China`s Evolving Growth Model: The Foshan Story

Transcription

Asian Perspectives Global Issues F G I R E P O R T China’s Evolving Growth Model: The Foshan Story XIAO Geng, ZHANG Yansheng, LAW Cheung-‐kwok & Dominic MEAGHER May 2015 Copyright © Fung Global Institute 2015 All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the publisher. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. Draft May 1, 2015
C O N T E N T S Contents ................................................................................................................... ii Figures ............................................................................................................................. iv Tables ............................................................................................................................... vi Maps ................................................................................................................................ vii Boxes .............................................................................................................................. vii Abstract ........................................................................................................................ viii Keywords ..................................................................................................................... viii Foreword ................................................................................................................ ix The Foshan Story .......................................................................................................... ix Acknowledgements ..................................................................................................... xi 1 Introduction .................................................................................................... 1 1.1 What we have learned ...................................................................................... 2 1.2 Structure of analysis .......................................................................................... 3 1.3 Where to from here? ......................................................................................... 4 2 China’s institutionalized reform process ................................................... 6 2.1 The state and the market: an institutional perspective ........................ 6 2.1.1 An institutional perspective of the market .................................................... 7 2.1.2 Building institutions ................................................................................................. 9 2.1.3 Centrally guided growth engines .................................................................... 13 2.1.4 Kuàikuài: The competitive market of local governments ..................... 16 2.1.5 Tiáotiáo: Lines and silos of central control ................................................. 18 2.1.6 Centralization and localization: Dual forces of change .......................... 20 2.1.7 Tiáo-‐kuài interaction ............................................................................................ 20 2.1.8 Structure of this report ........................................................................................ 22 3 Foshan and 15 other pioneer cities ...................................................... 24 3.1 Cities: where people, firms and government intersect ...................... 25 3.2 Foshan ................................................................................................................. 26 3.3 Development of Foshan’s administrative structure ............................ 27 3.3.1 Reorganization from rural counties to county cities (1992-‐1994) .. 28 3.3.2 Reorganization from county cities to municipal districts (2002) ..... 29 3.3.3 Foshan’s urbanization: A multi-‐center city ................................................. 32 3.3.4 Performance evaluation criteria for Foshan officials ............................. 33 3.4 Foshan’s general economic situation ....................................................... 35 4 Final goods and services ........................................................................... 49 4.1 Foshan’s Industrial-‐output growth ........................................................... 50 4.2 Foshan’s reform-‐driven growth ................................................................. 51 4.3 Impact on factor markets ............................................................................. 54 4.4 Industrial clusters and ‘specialized towns’ ............................................ 55 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y ii 4.4.1 Case study: Foshan Ceramic Group ................................................................ 59 4.5 Ownership reform: privatization of SOEs ............................................... 60 4.5.1 Foshan’s implementation of ownership reform ....................................... 61 4.6 Industrial upgrading and services ............................................................ 64 4.6.1 Case study: Keda ..................................................................................................... 70 4.6.2 Case study: Transformation of Foshan’s ceramics industry due to pollution concerns ................................................................................................................. 72 4.7 Services-‐oriented Development ................................................................. 73 5 Land ................................................................................................................. 76 5.1 Household contract responsibility system ............................................. 77 5.2 Land Administration Law (1986) .............................................................. 78 5.3 Land use in Foshan ......................................................................................... 79 5.4 Rising land values ........................................................................................... 85 5.4.1 Case study: Stone Village land-‐ownership innovation ........................... 89 5.5 Problems emerging from the land market ............................................. 90 5.5.1 Property disputes ................................................................................................... 90 5.5.2 Reduction of arable land ..................................................................................... 91 5.5.3 Land finance ............................................................................................................. 92 5.6 Conclusion ......................................................................................................... 94 6 Labor: the human factor ........................................................................... 96 6.1 Creating a labor market ................................................................................ 99 6.2 Education and vocational training .......................................................... 100 6.3 Transition to sustainable jobs .................................................................. 101 6.3.1 Reforming China’s labor geography ............................................................. 102 6.3.2 Reforming China’s labor market .................................................................... 103 6.3.3 Labor-‐market regulation and dispute-‐resolution .................................. 104 6.4 Attracting and retaining talent ................................................................. 105 6.4.1 Healthcare ............................................................................................................... 106 6.4.2 Environment ........................................................................................................... 108 6.4.3 Housing ..................................................................................................................... 108 6.4.4 Pensions ................................................................................................................... 109 6.5 Conclusion ....................................................................................................... 111 7 Infrastructure ............................................................................................ 112 7.1 Demand for infrastructure ......................................................................... 112 7.2 Tiao-‐kuai dynamics: infrastructure demand outstrips capacity ... 113 7.2.1 Transport projects and institutional development ............................... 113 7.2.2 Energy ....................................................................................................................... 117 7.3 Institutional development: market vs rent-‐seeking responses .... 122 7.4 Economic and social impacts ..................................................................... 123 7.4.1 Local-‐government debt ...................................................................................... 123 7.4.2 Rent-‐seeking ........................................................................................................... 124 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y iii 7.5 Environmental Impacts ............................................................................... 125 7.5.1 Transportation infrastructure and the environment ........................... 125 7.5.2 Water infrastructure and pollution .............................................................. 127 8 Finance ......................................................................................................... 130 8.1 Finance in China’s evolving growth model ........................................... 130 8.1.1 Monetary and fiscal policy ............................................................................... 131 8.2 Financial and monetary institutional evolution ................................. 132 8.3 Finance in Foshan .......................................................................................... 133 8.3.1 Fixed-‐Asset Investment in Foshan ................................................................ 136 8.3.2 Underdeveloped financial sector ................................................................... 140 8.4 Public finances ............................................................................................... 145 8.4.1 Tax-‐sharing system of 1994 ............................................................................ 146 8.4.2 Government revenue of Foshan ..................................................................... 147 8.4.3 Government expenditure of Foshan ............................................................ 148 8.4.4 Local-‐government debts in China and Foshan ........................................ 149 8.4.5 Conclusion: Tiáo-‐kuài dynamics in China’s financial sector .............. 158 9 Conclusion ................................................................................................... 162 9.1 New thinking on key challenges for China ............................................ 164 9.1.1 Local-‐government debt for sustainable development ......................... 164 9.1.2 Land: The dual-‐track issues ............................................................................. 165 9.1.3 Social policy and the environment ............................................................... 166 9.1.4 Small and medium-‐size enterprises ............................................................. 168 9.1.5 Sustaining growth ................................................................................................ 168 9.2 New thinking raises new issues ................................................................ 169 9.2.1 The importance of geography and competition among regions ...... 169 9.2.2 Macro-‐policy response to structural issues .............................................. 170 9.2.3 Integration versus competition ...................................................................... 170 9.3 Final comment ................................................................................................ 170 Bibliography ...................................................................................................... 172 Appendix A: data used to produce figures .............................................. 179 Appendix B: additional tables and figures .............................................. 198 FIGURES Figure 2.1 | Theory of the firm: A web of contracts ............................................................. 8 Figure 2.2 | Consequences of government and market success or failure ............. 12 Figure 2.3 | China's tiáo-‐kuài governance matrix .............................................................. 15 Figure 2.4 | Tiáotiáo: Lines and silos ...................................................................................... 19 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y iv Figure 2.5 | Consequences of growth ...................................................................................... 22 Figure 2.6 | China's evolving development priorities ...................................................... 22 Figure 3.1 | Sixteen “super” cities’ share of China’s GDP (2012) ................................ 24 Figure 3.2 | Foshan’s real-‐ and nominal-‐GDP growth & trends (1979-‐2013) ....... 36 Figure 3.3 | Foshan’s GDP by expenditure (1996-‐2011) ................................................ 36 Figure 3.4 | Foshan government consumption by value and share of GDP (1996-‐
2010) ........................................................................................................................................... 37 Figure 3.5 | Foshan government consumption YoY growth (1997-‐2010) ............. 37 Figure 3.6 | Ratio of exports to industrial output (Foshan 2000-‐2010) .................. 38 Figure 3.7 | Foshan net exports of goods and services as share of GDP (1996-‐
2011) ........................................................................................................................................... 39 Figure 3.8 | Foshan's GDP by industrial sector (1978-‐2011) ....................................... 40 Figure 3.9 | Guangzhou’s GDP by industrial sector (1978-‐2012) .............................. 41 Figure 3.10 | Shenzhen’s GDP by industrial sector (1979-‐2012) ............................... 41 Figure 3.11 | Ratio of utilized FDI to GDP in Foshan (1996-‐2013) ............................ 45 Figure 3.12 | Foshan industrial-‐output share by enterprise (2000-‐2011) ............ 45 Figure 3.13 | Foshan tax contribution by enterprise (2001-‐2011) ........................... 46 Figure 3.14 | Foshan profit contribution by enterprise (2001-‐2011) ...................... 46 Figure 3.15 | Enterprise profits as share of Foshan GDP (2001-‐2011) ................... 47 Figure 4.1 | Gross industrial output: Foshan, Guangzhou, Shenzhen and China average (1996-‐2010) ........................................................................................................... 51 Figure 4.2 | ‘Specialized towns' share of Guangdong cities’ GDP (2009) ................ 57 Figure 5.1 | Land use in Foshan ................................................................................................. 80 Figure 5.2 | Sources of Foshan’s wealth growth (2005-‐2010) .................................... 85 Figure 5.3 | Revenue model for collective-‐owned rural land ....................................... 86 Figure 6.1 | Theory of the household: Web of contracts ................................................ 96 Figure 6.2 | Families’ demand for services and lifestyle .............................................. 106 Figure 7.1 | Electricity generation in Foshan (1978-‐2011) ........................................ 118 Figure 7.2 | Electricity consumption by city and province (2005-‐2010) .............. 118 Figure 7.3 | Foshan water consumption and sewage (2001-‐2011) ........................ 128 Figure 7.4 | Foshan water-‐infrastructure development (2004-‐2011) ................... 128 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y v Figure 8.1 | Deposits relative to GDP in Foshan and China (2003-‐2012) ............. 133 Figure 8.2 | Loans relative to GDP in Foshan and China (2003-‐2012) ................... 134 Figure 8.3 | Foshan bank deposits by source (1984-‐2010) ........................................ 134 Figure 8.4 | Short-‐term versus long-‐term loans in Foshan (1984-‐2010) ............. 135 Figure 8.5 | Distribution of short-‐term loans in Foshan (1984-‐2009) ................... 135 Figure 8.6 | Schematic of Foshan’s financial system (2007) ....................................... 136 Figure 8.7 | Sources of fixed-‐asset investment in Foshan by value (2000-‐2011)
..................................................................................................................................................... 138 Figure 8.8 | Sources of fixed-‐asset investment in Foshan (2000-‐2011) ................ 138 Figure 8.9 | Investment in fixed assets as a share of GDP (2003-‐2012) ................ 139 Figure 8.10 | Investment in real estate as a share of GDP (2003-‐2012) ............... 140 Figure 8.11 | Development path of financial markets ................................................... 141 Figure 8.12 | Contribution to Foshan’s GDP by industrial-‐enterprise size (1998 and 2010) ................................................................................................................................ 143 Figure 8.13 | Contribution to Foshan’s total industrial employment by industrial-‐
enterprise size (1998 and 2010) .................................................................................. 143 Figure 8.14 | Non-‐performing loan ratios of Foshan firms by size .......................... 144 Figure 8.15 | Local-‐government contribution as a percentage of total government revenue and expenditure (1978-‐2013) ..................................................................... 146 TABLES Table 3.1 | China's 16 high-‐income cities with large GDPs and populations ......... 25 Table 3.2 | Comparison of municipal-‐district and county-‐level governments ..... 30 Table 3.3 | Institutional comparison: Nanhai, Shunde, Sanshui and Gaoming versus Chancheng (2002 to present) ............................................................................ 31 Table 3.4 | Foshan performance management guidelines ............................................. 34 Table 3.5 | Foshan’s services sectors as percentage of GDP (2004-‐2011) ............. 42 Table 3.6 | Guangzhou’s services sectors as percentage of GDP (2004-‐2011) ..... 43 Table 3.7 | Shenzhen’s services sectors as percentage of GDP (2005-‐2011) ........ 43 Table 3.8 | Structure of Foshan’s industrial output (above scale) by enterprise 48 Table 4.1 | Top 10 industries in Foshan by output (1986-‐2011) ............................... 66 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y vi Table 4.2 | Labor productivity of Foshan’s most efficient industries (2001-‐2011)
....................................................................................................................................................... 68 Table 4.3 | Labor productivity of Foshan’s top 10 industries (2011) ....................... 69 Table 4.4 | Labor productivity of Guangzhou’s top 10 industries (2011) .............. 69 Table 4.5 | Labor productivity of Foshan’s “electrical machinery & equipment” industry (2001-‐2011) .......................................................................................................... 70 Table 5.1 | Key dates in China's land requisition-‐compensation reform ................ 84 Table 5.2 | Compensation for land requisition in Foshan (1979-‐2002) .................. 84 Table 5.3 | Number of enterprises by district in Foshan (1980-‐2002) .................... 87 Table 5.4 | Land prices by property type and district in Foshan (Q1 2011) ......... 87 Table 5.5 | Land-‐finance trends in China’s local government ...................................... 88 Table 5.6 | Land finance trends in Foshan ............................................................................ 88 Table 5.7 | Property prices in select cities (2012) ............................................................ 93 Table 5.8 | Property prices in Foshan (2002-‐2013) ......................................................... 94 Table 6.1 | Select labor-‐reform implementations and impacts on Foshan ............. 99 Table 8.1 | Market capitalization (A & B shares) relative to GDP in select cities (2009) ....................................................................................................................................... 142 Table 8.2 | Coverage and rates of China’s VAT ................................................................. 147 Table 8.3 | Foshan government revenue (1994-‐2011) ................................................. 148 Table 8.4 | China's local-‐government debt and liabilities (2013)* .......................... 150 Table 8.5 | Foshan and the national local debt and liabilities (2013) .................... 151 Table 8.6 | Foshan public finance (RMB billion) .............................................................. 153 Table 8.7 | Foshan public finance (as percentage of its GDP) .................................... 153 Table 8.8 | Estimated 2013 debt-‐service payments of Foshan government ....... 155 Table 8.9 | China's 16 high-‐income pioneer cities .......................................................... 157 MAPS Map 3.1 | Foshan's location in Guangdong Province, Southeast China .................... 27 Map 4.1 | Major production clusters in Foshan .................................................................. 56 BOXES Box 5.1 | Chronology of key land reforms ............................................................................. 81 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y vii ABSTRACT China’s Evolving Growth Model: The Foshan Story offers a systematic method of understanding the nation’s governance and transition to a market-‐based economy by examining the evolution of one of its most dynamic cities. With more than seven million people and a top-‐tier per capita GDP by World Bank standards, the southeastern city of Foshan has been in the vanguard of China’s market reforms since 1978. Indeed, Foshan has consistently pushed the limits of reform, thanks largely to its geography. Situated within Guangdong Province in the Pearl River Delta, it is the ancestral home of many of the business leaders of nearby Hong Kong, a thriving global city that owes much of its success to rule of law, international business and the market economy. As well, it was a prime beneficiary of Deng Xiaoping’s famous “southern tour”, as a result of which he nominated Guangdong and Fujian as reformist provinces. Time and again, Foshan has implemented policies seemingly at odds with those of the central government, only to have them adopted nationally once they have proved successful. The Foshan Story exemplifies China’s reform driven growth model and shows clearly how the necessary institutional changes emerge not only from the “right” state-‐market balance but from co-‐operation between the two. This comprehensive case study, informed by unrivaled access to both central-‐ and local-‐government officials, provides a grassroots perspective of China’s growth. KEYWORDS China, Foshan, Chinese economy, growth, growth model, institutional economics, reform, governance, transition. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y viii F O R E W O R D We are honored to undertake this Foshan (佛山) Study in partnership with China’s National Development and Reform Commission (NDRC). This joint project was originally conceived and organized in 2012 as a result of conversations between Xiao Geng (肖耿) of the Fung Global Institute (FGI) and Zhang Yansheng (张燕生), Secretary-‐General of the Academic Committee of the National Development and Reform Commission (NDRC). FGI’s Academic Council Chairman, Michael Spence, FGI President William Overholt, its past President, Andrew Sheng (沈联涛) and especially FGI Distinguished Fellow Liu Mingkang (
刘明康) provided crucial guidance on the initial conceptualization and throughout the execution of the Project. THE FOSHAN STORY The FGI and NDRC research teams picked Foshan because of its long history of pioneering market reforms in China. Foshan transformed itself in 35 years from little more than a rural village with no recognized markets or individual firms to a modern industrial urban center with tens of thousands of private companies directly plugged into global supply chains. At the heart of Foshan’s transition was the emergence of corporations and markets. Key to that evolution was the nature of the relationship between state and market. Debates have been raging across the globe for years now over defining the “magic mix” between states and markets. As with so many large questions, simple answers are elusive. Moreover, it is inconceivable that a single formula is right for all economies. With the Foshan study, here was an opportunity to shed light on the evolution of one model of a state-‐market relationship that has produced a remarkable success story as well as a number of serious development challenges. The Foshan study offers lessons for China as well as other economies grappling with similar circumstances. The study makes clear that it is not enough to ask how much state and how much market. Just as important is how the state and market work together. How can mutually supportive interactions deliver economic and social advancement while at the same time maintaining fiscal and environmental integrity? Examples throughout the study demonstrate how China’s central and local governments have worked to enable private corporations and facilitate expanding markets and supply clusters. The study’s insights on the complementary but differentiated roles of the state and the market are highly relevant for business, society, and policy-‐making. The Foshan study’s focus on relationships between state and market coincided with the core theme of the reform blueprint announced by China’s new leadership under President Xi at the November 2013 Third Plenum of the 18th C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y ix Congress of CPC. The blueprint calls for the market to be the decisive force in allocating resources and for governments to evolve in their role of enabling and supporting markets. Foshan recorded an impressive annual average GDP growth rate of 17 percent for 35 years, with growth becoming more stable over time. By 2012, Foshan’s per capita GDP was higher than those of Beijing and Shanghai. Foshan was already a high-‐income economy by the World Bank standard. Participation in global supply chains was critical to Foshan’s industrialization. When China opened to the world in the 1980s and 1990s, Chinese cities competed to attract foreign direct investment. It has become increasingly apparent how critical competition among Chinese cities has been for China’s long-‐term growth. Municipal governments have enjoyed remarkable autonomy over local economic policy, especially in regard to land usage. The municipalities were encouraged to experiment with better institutions for local economic growth. The Foshan study team discovered that this competition among regions, and particularly among local officials, was a critical driver for local policy and institutional innovation that spurred Foshan’s economic growth. The same basic growth model has applied, with appropriate contextual modifications, to dozens of cities across China. Foshan is situated close to Hong Kong. The families of many Hong Kong business leaders were originally from Foshan. When officials and business people from Foshan were looking for ways to grow their local economy, they came to Hong Kong to learn how the city had gone about building firms and markets. They learned about the importance of institutions in empowering private enterprise and free markets, especially through institutional infrastructure that supported property rights, market platforms, and dispute resolution. Today, on average, one in 20 people in Foshan owns an enterprise. Foshan has developed some 30 specialized markets or supply clusters built across competing townships. Foshan is a city of SMEs, which account for the largest share of its output and employment. Half of its population consists of migrants. The Foshan study helps outsiders to understand China’s reform momentum. Readers of this study who assume that the Foshan story is about progress under the umbrella of a Special Economic Zone or a Free Trade Zone will be surprised to learn that these developmental devices were not important for Foshan. Incremental market-‐oriented reforms spread across local districts, townships, and even villages were at the heart of progress. Over time the more successful of these reforms are replicated with suitable refinement and more widely diffused. This “trial and error” development strategy has become a scientific method in China – trial, observation, evaluation, replication, and trial again. The scientific C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y x nature of China’s reform process can only be seen clearly through a holistic vision of central-‐local-‐market interactions over time, which is what the Foshan study calls tiáo-‐kuài (条块) dynamics. Foshan is not the only city in China that has experienced remarkable growth over the past four decades. The study draws attention to 16 other large Chinese cities, each with populations over five million, that have surpassed the World Bank’s standard of high-‐income. These cities combined are home to 12 percent of China’s population and almost a third of its GDP. They are illustrative of life in the China of the future. They are drawing people, business, capital, and technology from around the country and beyond. What lessons can we draw from Foshan to help those in less developed regions in China and elsewhere? The study notes that even though other places could replicate the market-‐
oriented institutions and practices pursued by Foshan, they may not be able to grow as fast. Certain factors crucial for local growth and development are difficult if not impossible to replicate, such as geographical location. Many of the problems facing the Chinese economy today have roots in an under-‐appreciation of the importance of geography in a market economy where people, goods, companies, and information can move faster than plans and practices set by the local officials. This insight is important for understanding the phenomena of ghost towns, local government debt, and overcapacity in some of China’s 300 cities that are performing less well. The Foshan study is not only a success story. It also carries warnings for Foshan and China more generally on issues relating to economic, social, and environment sustainability. The limits of GDP growth targeting, the side effects of central planning and difficulties in managing macro-‐policies within a regionally diverse Chinese economy are creating significant challenges. Despite Foshan’s record as one of China’s best-‐performing cities in China, it faces sustainability challenges with respect to public debt financing, land-‐use issues, social inclusion, consistency in governance, SME survival and growth, and environmental quality. Foshan is one of the most polluted cities in the Pearl River Delta. As a high-‐income, relatively wealthy city in the region, Foshan must lead the way in cleaning up its water, air, and production methods. If Foshan continues to pollute at its current rate, the adverse effects will increasingly spread to communities elsewhere in the region. Central and local authorities are well aware of all these challenges and will have to strive to address them in the years to come. ACKNOWLEDGEMENTS Although confined to a single city of 7 million people, the Foshan study is still an ambitious project. It has drawn on a much larger written research effort C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y xi involving NDRC and FGI, with inputs from numerous individuals based in Foshan and elsewhere from government, business, research networks, experts and advisers. Interviewees who gave willingly of their knowledge are too numerous to mention individually. A collection of 14 background papers in Chinese were written by the NDRC team of 25 researchers under the supervision of Zhang Yansheng and Xiao Geng, including Du Yue (杜月), Guan Bo (关博), Huang Weiting (黄卫挺), Huang Zhengxue (黄征学), Jiang Runyu (姜润宇), Li Liancheng (李连成), Li Lu (李璐), Liu Heng (刘恒), Liu Libing (刘厉兵), Ma Qiang (马强), Sun Changxue (孙长学), Sun Chunlei (孙春雷), Tan Yongsheng (谭永生), Tian Zhilei (田志磊), Wan Haiyuan (万
海远), Wang Yang (王阳), Wang Yangkun (王阳堃), Wei Guoxue (魏国学), Wu Jiang (吴疆), Wu Yaping (吴亚平), Xie Yunliang (解运亮), Xing Wei (邢伟), Yang Changyong (杨长湧), Zhang Luqin (张璐琴), and Zhao Xuefeng (赵雪峰). The product of this effort is being published in China. The collaboration with NDRC has been invaluable. Prior to producing the current integrated report, the FGI research team drafted a series of eight unpublished background sector papers. The authors of these papers were Galvin Chia (谢嘉仁), Jeffrey Tong (唐文略), Jodie Hu (胡文静), Law Cheung-‐Kwok (罗祥国), Law Kino (罗建一), Li Chen(黎晨), Ma Jing (马静), Michelle Liang (梁松怡), Oliver Chase (薛峰), Sun Wenbin (孙文彬), Wan Qian (万千), Warren Lu (陆文质), Xiao Geng (肖耿), Yang Shiming (杨诗鸣), Zhou Zifang (周梓
芳), and Zhu Yan (朱岩). On the FGI side acknowledgements are also due to former researchers including Alex Wong (黄浩伦), Amanda Shi (史梦宁), Karen Kao (高惟敏) and Sarah Lo (罗宝
恩). Booz & Company experts Sophia Pan (潘玥昉), Xu Huchu (徐沪初) and Yu Jing (余婧) also contributed to the work. Over the course of the Foshan study, in addition to the guidance of Michael Spence, William Overholt, Andrew Sheng and Liu Mingkang, valuable advice and guidance was generously given by Andrew Cainey, Chang Ka-‐Mun (张家敏), Arian Hassani, Donald Lessard, Pamela Mar, Sarah Monks, John McArthur and Wu Jinglian (吴敬琏). The Foshan government provided crucial support. Secretary of Foshan municipal party committee Liu Yuelun (刘悦伦), Vice Secretary of Foshan municipal party committee Li Zifu (李子甫), Director-‐General Zhao Hai (赵海), Deputy Director-‐General Li Houcheng (李厚成) and Deputy Director-‐General Xu Ping (徐平) all provided valuable insights. A comprehensive volume on Foshan’s reforms over the last three decades was produced by 32 Foshan government units, which provided invaluable input into this study. A large number of outside experts participated in this project’s workshops and gave critical feedback and insights, including Bai Hejin (白和金), Cai Fang (蔡昉), Cao Yuanzheng (曹远征), Chen Wenling (陈文玲), Chen Xiaohong (陈小洪), Chu C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y xii Fuling (褚福灵), Ding Li (丁力), Du Chuang (杜创), Fan Jinsong (范劲松), Gao Peiyong (高培勇), Ge Yanfeng (葛延风), Gong Huiming (龚慧明), Guan Tao (管涛), Han Xiaoping (韩晓平), Li Houcheng (李厚成), Li Jiange (李剑阁), Li Ling (李玲), Li Shantong (李善同), Liang Zhiping (梁治平), Liao Qiang (廖强), Lin Zhaomu (林兆木
), Liu Ji (刘吉), Liu Lin (刘琳), Liu Shouying (刘守英), Liu Xianfa (刘宪法), Liu Yanbin (刘燕斌), Lu Feng (卢锋), LÜ Ping (吕萍), LÜ Zheng (吕政), Ma Jun (马骏), Mao Shoulong (马寿龙), Mo Rong (莫荣), Pei Changhong (裴长洪), Qi Chuanjun (齐
传君), Qiu Haixiong (丘海雄), Song Li (宋立), Song Min (宋敏), Song Xiaowu (宋晓
梧), Sun Zhijun (孙志军), Tan Yian (谭以安), Tao Ran (陶然), Wang Yuan (王沅), Wu Jianhong (武剑红), Wu Jianmin (吴建民), Xu Xiaonian (许小年), Xu Yunxiao (许
云霄), Yang Heqing (杨河清), Yang Wangcheng (杨望成), Yang Zhaohua (杨兆华), Yao Yuqun (姚裕群), Yuan Liansheng (袁连生), Yue Xiuhu (岳修虎), Zhang Hanya (
张汉亚), Zhang Liqing (张礼卿), Zhang Lizi (张粒子), Zhang Shuguang (张曙光), Zhang Yuge (张玉阁), Zheng Bingwen (郑秉文), Zheng Gongcheng (郑功成), Zhong Tingjun (钟庭军), and Zhu Ruixiang (祝瑞祥). This report on Foshan and China’s evolving growth model is a commendable example of collaborative research, and I offer my congratulations to all concerned. It is one of the three major FGI studies on China – the other two are on China’s shadow banking and the RMB internationalization. I believe that this effort will be useful for policy makers, business people, and those interested in understanding China’s evolving growth and development and that it will make an informed contribution to a debate that will continue in the years to come, both in China and elsewhere. Victor K. Fung (冯国经) Chairman Fung Global Institute
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y xiii 1 I N T R O D U C T I O N It is a behemoth – by some measures the biggest in the world – and when it sneezes, there is probably not a place on the planet that doesn’t at least shiver. Yet, for all that, China’s economy is poorly understood. After 35 years of high-‐speed growth, it is now the largest in the world by purchasing power, albeit four times less wealthy per capita than that of the USA. Yet exactly how it got there and where it is heading remain subjects of robust debate, with forecasts running the gamut from a further 20 years of rapid expansion to imminent crisis. Major questions being asked about China’s future include: Will China join the OECD as a high-‐income economy? Will it be toppled by imbalances? Will over-‐investment lead to crisis? How will it manage local-‐
government debt? Will its property market collapse? And what to make of shadow banking? The Foshan Story offers a different approach. We begin by developing an integrated model of China’s institutional structure and reform process. We then systematically apply the model across a range of broad economic sectors in the dynamic, pioneer city of Foshan. Our approach sheds light on many questions of concern to the international community. Significantly, it provides a different perspective of which questions are most important. Our teams of Chinese and Western economists have had access to numerous interviews conducted in China over the past three years that enable us to explain the country’s growth from a local perspective but using Western language and concepts. With Foshan as an example, we examine how China works – specifically, how the state, markets and households interact to create a dynamic economy with evolving institutions. We believe that this focus on the experiences of people in a single city can help clarify key challenges facing the country as a whole. A city of more than seven million people in the southeastern Pearl River Delta’s Guangdong province, Foshan has consistently been in the vanguard of China’s market reforms. It has averaged 17 percent growth during the past 35 years, lifting itself into the World Bank’s top-‐tier high-‐income category. Focusing on a single city inevitably constrains our analysis. We do not cover issues that may be important nationally unless they are relevant to Foshan. Reform of state-‐owned enterprises (SOE), for example, is critical to China’s economic future but of little importance to Foshan’s development and so falls mostly outside the scope of our report. We accept such limitations as the price of richer detail. Our central question has been: How do China’s key institutional structures shape local development? The Foshan Story provides an answer. In tracing the C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 1 remarkable development of this city, we examine the background to and consequences of key events and decisions, highlight lessons for the nation as it pursues sustainable growth and argue that the rest of the world needs to rethink its approach to China. 1.1
WHAT W E H AVE LEARNED China’s economy is not a monolith. Much of its success derives from 16 “super” cities, including Foshan, with GDPs of more than USD100 billion. They account for some 30 percent of national GDP yet are home to only 12 percent of the population, placing them in the World Bank’s top-‐tier high-‐income category. (Foshan ranks ninth of the 16 in terms of per capita GDP.) Although other Chinese cities also boast GDPs of more than USD100 billion, their boundaries encompass such large populations that they fall short of the World Bank’s high-‐income threshold. Chongqing, for example, in the center of the country, has one of the largest and fastest-‐growing economies, but its wealth is spread among some 30 million people. Given the wide diversity of economic growth across China, studies of such cities are important in the future. Our research included conducting interviews, hosting workshops, reviewing data and analyzing a range of reports, case studies and business notes. Everywhere, we found evidence of competition-‐driven dynamism – not only in the market place. China’s cities compete against each other. For example, Foshan’s success in attracting migrants, who account for 50 percent of its workforce, has reduced the labor pool elsewhere. Similarly, different sectors within the city’s economy – such as supply chains for industry, finance, land, labor and infrastructure – both complement and compete with each other. This competition-‐driven dynamism both responds to and helps drive national reforms and growth. However, the results are not always positive. Foshan’s worrying levels of pollution and government debt, for example, are also consequences of competition. Understanding how governance and state-‐market dynamics shape local development is crucial for China’s future. Its governance matrix, known as tiáo-‐
kuài (an agricultural analogy, literally translating as “branch” and “lump”), comprises vertical tiáo lines of central party and state input and horizontal kuài levels of jurisdiction and autonomy. The aim is to encourage positive competition while limiting negative outcomes, such as by assisting markets with allocating resources, reducing transaction costs and providing fair dispute-‐
resolution processes. The Foshan Story offers an insight into that relationship and highlights emerging environmental, social and economic challenges. While Foshan and other pioneer C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 2 cities must now learn to solve those problems, their experiences may enable other developing Chinese cities to avoid them in the first place. China’s unique competition-‐driven dynamism distinguishes its reform process from the Western experience. Instead of a public debate ending in legislation, Chinese reform progresses through a convoluted process. Sometimes, it is top-‐
down, whereby central leaders pronounce policy in vague terms, local authorities compete in their interpretations and the most successful is rewarded and more widely adopted. Sometimes, it is bottom-‐up, with local authorities’ successful solutions to ad hoc problems being adopted as national policy. The Foshan Story offers a unique insight into this process, particularly the bottom-‐up process, given the city’s selection, along with others in Guangdong and Fujian provinces, as a testing ground for market reforms from the early 1980s. Indeed, many of China’s reforms and institutional changes began in Foshan. How this process works and impacts the economy is crucial to understanding China. 1.2
STRUCTURE O F A NALYSIS We begin our analysis by setting out our conceptual view of China’s institutional reform-‐driven growth model (Chapter 2). We then explain how the country’s tiáo-‐kuài governance matrix creates institutions that oversee key elements of economic, social and political interactions and how the tiáo-‐kuài dynamics shape these outcomes as well as markets. We focus on the city level because this is where markets enable enterprises and individuals to organize and motivates them to supply society’s needs. In China, cities provide the infrastructure on which enterprises rely; they govern the use of land on which enterprises are built; and they attract and train the talent on which enterprises depend. As well, cities are where the majority of the population now lives, works and plays. Cities have autonomy within the tiáo constraints created by higher jurisdiction kuài and compete to be the most productive. Such success is the primary means by which Chinese local officials win promotion. Despite some unique characteristics, Foshan is typical of the 16 “super” cities we have identified in our study. More importantly, we argue that many of the lessons it has learned and the challenges it still faces are relevant to other parts of the country, including those developing more slowly or in different ways. Indeed, the diversity of China’s cities has been a key insight into understanding the nation’s development and has even added to our understanding of economics as a discipline. In Chapter 3, we provide an overview of Foshan: its geography, basic economic indicators, particular local governance structures and current fiscal situation. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 3 We then compare it with the other 15 pioneer “super” cities. This helps show its importance in understanding China’s growth. It also gives some insight into the diversity within China’s economy that results from a regionally competitive experimental reform system. The underlying point is that while some cities struggle, others thrive, with no expectation that these will remain constant. The corporation as a legal entity that combines factors of production into more valuable products or services is one of history’s most successful and important institutions. If the operating environment is structured properly, the corporation’s contribution to human development can be remarkable. Equally, a faulty environment can channel that creative energy into harmful pursuits. Households are also units of production and consumption. They invest in skills, education and experience, which they supply as labor and talent to firms, while consuming products and services and participating in society and politics. Firms and households interact with the economy and society through a web of contracts and relationships. This provides a framework for understanding China’s economic growth from a grassroots perspective, which is the focus of the remainder of our study. In separate chapters, we consider how China’s reform process and institutional evolution have affected each of Foshan’s key markets: products (Chapter 4), land (Chapter 5), labor (Chapter 6), infrastructure (Chapter 7) and finance (Chapter 8). In each case, we explain key features of the particular market, trace its development and show how it interacts with others to create economic value. We also identify the relevant elements of tiáo governance and highlight key changes in the interactions between these and Foshan’s various kuài over the years. As well, we analyze the institutions they created with a view to explaining their roles in facilitating positive and negative economic outcomes. Throughout, we provide micro-‐case studies of specific decisions, companies or projects that illuminate particular elements of the relationship between top-‐
level governance and local development. 1.3
WHERE T O FROM H ERE? The Foshan Story has changed the way we understand China – as we hope it will for the reader. This implies a new way of thinking about many of the issues currently being debated around the world such as local-‐government debt, land use, property rights, rule of law, the hukou welfare system, education, SMEs and economic, environmental and social sustainability. This new perspective also has changed our view of which issues we now believe are most important. These include the role of economic geography, how China uses macro policies to manage its economy and the future of cities as urban C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 4 integration produces mega-‐regions such as the Pearl and Yangtze River Deltas and the area surrounding Beijing. We present this study in hopes of stimulating vigorous challenges to our new way of thinking about China and our analysis of the issues raised. Most importantly, our aim is to encourage a better understanding of the real China. We turn now to an explanation of our new approach to China’s evolving growth model, especially how its institutional structures make this remarkable nation work the way it does. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 5 2 C H I N A ’ S I N S T I T U T I O N A L I Z E D R E F O R M P R O C E S S A proper understanding of China’s institutions and reform processes is crucial to any analysis of the country’s rapid development. However, China’s institutions are different than those with which most Western analysts are familiar. We argue that this is at the heart of many faulty conclusions. As well, the pace of its reforms and institutional evolution renders any analysis based on static assumptions incomplete at best. The centrality of institutions to economic outcomes has led some economists to draw parallels between the reasons some countries become rich and their development of good institutions (Acemoglu, Johnson, & Robinson, 2005). Although traditional economic-‐growth models are useful, they tend to describe, rather than explain (North & Thomas, 1976). Institutional economic analysis1 attempts to address the reasons for economic growth. To better understand China’s rapid development, we draw on both. An institutional perspective is consistent with traditional economics. The Chinese are not economically different than anyone else. However, their incentives are not necessarily the same – and incentives are crucial. This chapter develops an analytical model of China’s institutional structures as a means of understanding its process of reform and development, as well as how this affects the businesses and households whose interactions form the market. We begin with a discussion about the natures of state and market from an institutional perspective and then explain how China’s institutions address economic, social and environmental challenges and have driven its rapid growth since the late 1970s. 2.1
THE STATE A ND T HE M ARKET: A N INSTITUTIONAL PERSPECTIVE Traditional economics tends not to consider the state and the market as institutions. Yet we argue that such a perspective is crucial to understanding China’s development. Institutional economics sees the two as inextricably linked, with their interaction being potentially complementary or confounding. Rodrik explains private-‐market activity as occurring within “a framework of public action that encourages restructuring, diversification, and technological 1 Robert Coase is often credited with having revived institutional economics, especially with his seminal contribution on the theory of the firm (Coase, 1937), which inspired the structure of our analysis. However, Richard Posner and Gary Becker may have done more to progress the field – Posner through linking economics to law and Becker by convincing the world that economic analysis applies to all human (or even non-‐human) behavior and not only to financial affairs. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 6 dynamism beyond what market forces on their own would generate” (Rodrik, 2007). Just as states can either support or suffocate markets, those same markets can either pursue sustainable production or short-‐term gain. The positive dynamic interaction of state and market is a key driver of growth. There are many direct and indirect state-‐market interactions. For example, governments and SOEs may directly provide goods and services such as public housing, healthcare, transport, utilities and education. Similarly, fiscal, monetary and pricing authorities typically shape the macro environment via allocation of the likes of money, credit and natural resources2. Most important are the institutional foundations of growth. These are built upon a legal infrastructure that delineates, registers, transfers and enforces rights and responsibilities of people and entities within a state’s jurisdiction. Through a combination of direct economic activity, macro policy and such an infrastructure of rights, the state enforces the framework of public action in which markets function. The quality of markets depends on the state’s provision of enabling services and rules. To better appreciate how these two spheres of activity interact, we provide an institutional view of both market and state. 2.1.1
An institutional perspective of the market Firms are legal entities that combine factors of production into more valuable products and services to supply a market and, all things being equal, ultimately improve standards of living. They rely on a web of contracts and relationships and operate within a framework established by the state. Such a web is stylistically depicted in Figure 2.1. Critical contracts include those with consumers, suppliers, land-‐owners, infrastructure providers, financiers and workers. Each of these entities also exists within its own market. 2 The US Federal Reserve, for instance, sets the overnight lending rate at which banks can borrow short-‐term funds. By contrast, China targets inflation by adjusting the reserve requirement of banks and, until recently, restricting interest rates on loans and deposits. The USA licenses natural-‐
resources exploitation. During 2012-‐14, for example, it limited gas exports and it has been suspected of making oil prices a foreign-‐policy priority. Similarly, China has had considerable direct state involvement in setting prices, supply and even consumption levels of a range of natural resources. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 7 Figure 2.1 | Theory of the firm: A web of contracts Source: FGI analysis Final products: Relationship with consumers. The rapid growth of this market comes largely from China’s development as the “world’s factory”. This role was largely created by foreign multinationals and their supply chains. They were then supplanted and/or supplemented by local firms, using cheap, labor-‐
intensive processing and assembly, supported by SME component-‐makers and services providers. Chinese firms now interact directly with global consumers through a complex web of contracts (see Chapter 4). Marketization of the final-‐products market in China was an early step away from the planned economy. Manufacturing is largely responsible for the country’s current leading role in the global economy. Land: Relationship with land-‐owners (typically local government). Institutional innovations have refined land-‐use rights and helped develop property markets, fueling local economies and facilitating rapid industrialization. However, rights and regulations are not yet mature. Institutional changes in this sphere have been one of the main sources of Foshan’s growth (see Chapter 5). Labor: Relationship with workers. Households supply labor, typically committing significant resources to educate children. The market is also supported by the evolving and competing local networks of educational, research and social-‐welfare institutions. It is becoming increasingly globalized, with the participation of the likes of foreign schools, universities and businesses. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 8 In terms of aggregate welfare, households determine the value of an economy. They consume products and services, participate in society and politics, as well as supply labor, talent and savings to firms. Contracts between a firm and its employees are crucial to our understanding of enterprises. In many ways, a firm itself is a market in which each employee negotiates a contract to provide services that contribute to the production chain. Traditionally, such contracts were rigid, long-‐term and bound by tight guidelines. Increasingly, more flexible and diverse arrangements are emerging, making more apparent the similarities between firms and markets (see Chapter 6). Infrastructure: Relationship with government. This market requires long-‐term planning, large-‐scale fixed investment and administrative control. Thus, infrastructure is usually supplied by vertically integrated SOEs, particularly in areas such as logistics, energy, roads, telecoms, shipping, warehousing, development zones and ports. The quality, scale and relative efficiency of this market in China have been crucial to the country’s competitiveness and productivity. The introduction of local-‐government financing platforms (LGFP) has been one of the most significant developments. Owned by local governments, LGFPs are legal entities with specific mandates. Their treatment as legal entities has been key to China’s rapid infrastructure rollout and, thus, a major factor in its growth (see Chapter 7). Finance: Relationship with savers and borrowers. Clearly, finance is critical for the construction and maintenance of production facilities. In China, finance is characterized by state-‐owned banks, high levels of domestic savings, relatively underdeveloped financial markets and a closed capital account. We explore institutional changes in this market, as well as local-‐government debt and the interaction between central-‐government control of macro and financial policies and local governments’ incentives to expand their economies (see Chapter 8). 2.1.2
Building institutions Institutions determine the way firms interact in the market to form relationships with the likes of other businesses, government and consumers. China’s institutional development emerges from the interactions of local-‐ and central-‐
government agencies as they negotiate solutions to common social, political and economic problems. Creating well-‐functioning institutions is one of the most critical roles of the state and is fundamental to economic growth. Institutions define and govern economic and political rights, set incentives and resolve conflicts. North defines institutions as “the rules of the game in a society, or more formally … the humanly devised constraints that shape human interaction” (North, 1990). Institutions determine incentives to which individuals respond, profoundly influencing economic outcomes. Figure 2.2 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 9 describes three fundamental purposes of economic institutions, specifically in relation to property rights. Figure 2.2 | Fundamental purposes of economic institutions Source: FGI analysis Rights-‐creation: Property rights are essential to well-‐functioning markets. They delineate and formalize ownership. Indeed, without them, markets cannot exist. Posner calls this “the law of property, concerned with creating and defining property rights” (Posner, 1973). Before trade can occur, agreement is needed about ownership. In China, it is not always clear who owns what, especially land or intellectual property, despite significant improvement since the early 1980s. When people began using land for industry then, they often did so without title. Property rights require central registries, as well as accounting and legal processes. Despite much progress, China still has some way to go. For example, Beijing established a central registry of titles only in August 2014. Exchange-‐facilitation: Equally, markets cannot exist without a trusted process for exchanging rights. Posner calls this “the law of contracts, concerned with facilitating the voluntary movement of property rights into the hands of those who value them the most” (Posner, 1973). China has developed stock exchanges, electronic-‐payments platforms and public auctions for urban land, but not yet transparent equity exchanges for SMEs or rural land-‐use rights. This vacuum has been partly filled by innovative companies such as Alibaba and Tencent, which in effect do little more than supply trusted and convenient platforms for exchange and communication, significantly reducing transaction costs. Dispute-‐resolution: Finally, a fair and trusted dispute-‐resolution process is essential for well-‐functioning markets. Posner calls this “the law of torts, concerned with protecting property rights, including the right to bodily integrity” C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 10 (Posner, 1973). Despite some progress, mechanisms for uniform law enforcement and regulation remain a challenge. This is due in no small part to the fact that the government is often party to disputes and China’s political system has historically avoided making bureaucracy subservient to the law – a necessary condition for fair and trusted dispute-‐resolution. China has yet to develop an independent judiciary or arbitration system, a free press or adequate checks on administrative abuses that erode property rights3. The key role for policy in spurring economic growth entails improving market functioning. This, in turn, facilitates global trade and production, generating gains through specialization and scale. It also ensures that economic effort is directed towards ventures people consider valuable. But a well-‐functioning market requires a well-‐functioning state. Figure 2.2 summarizes the consequences of good and poor state and market institutions as a two-‐by-‐two matrix with four broad outcomes. Sustainable growth: Both state and market strive to improve productivity, environmental quality and social inclusiveness. Middle-‐income trap: Both pursue rents, creating distortions and policy gridlock. This increases transaction costs, with no productivity gains, creating social friction and environmental degradation. Based on historical patterns, this is most likely to happen when an economy reaches middle-‐income levels. Government failure: Firms wanting to improve productivity are confounded by corruption and red tape. Social exclusion is rife. Both businesses and households struggle in their dealings with governance and institutions. Governments make sub-‐optimal decisions and ignore market forces. Market failure: Although governments pursue productivity, market players exploits loopholes for private gain at public expense. A purely profit-‐oriented society can easily create extreme economic and political inequality, degrade the environment and fail to develop productive opportunities Resources are diverted to non-‐productive but privately profitable endeavors. 3 See earlier work in Sheng, Xiao and Wang, Property Rights and ‘Original Sin’ in China, 2004. See also Sheng, Xiao and Wang, Zhongguo jinrong gaige yu chanquan jichu sheshi [China’s Financial Reform and Property Rights Infrastructure], 2004 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 11 Figure 2.2 | Consequences of government and market success or failure Source: FGI analysis The latter two failure scenarios are extremes. Governments and markets tend to succeed or fail together. Avoiding the so-‐called middle-‐income trap of both government and market failure requires society to resist self-‐interest groups and positively change the institutions governing growth, without triggering crisis. A proper understanding of the functions of state and market institutions necessitates a holistic concept of growth. Focusing on economic metrics to the exclusion of, say, social welfare and the environment is clearly harmful. The importance of markets to traditional measures of productivity or economic growth has been discussed. We argue that markets are better perceived as intricate webs of contracts, whereby promises are continually being fulfilled, broken and renewed, according to formal contracts and laws or informal social norms4. As an economy grows and becomes increasingly interconnected, its market-‐facilitating institutions also become more complex. Thus, economic growth requires stability, regeneration and improvement of institutions, including clarity and protection of rights, efficient exchanges and fair and trusted means of dispute-‐resolution. 4 As articulated by Leijonhufvud, 2012 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 12 Similarly, social and political development depends on institutions that link people and governance. These define the freedoms of households and communities, as well as what is socially and legally acceptable. Responsibilities are an essential component of rights)5. They define what individuals owe each other, their families and society. Such responsibilities have been central to Chinese society for thousands of years. Social and political rights shape views of what is considered moral. They affect individuals’ actions, interactions and aspirations. Defining and upholding these rights equitably and justly is essential for a well-‐functioning society. Environmental development also depends on rules and institutions. These ensure acceptable uses of natural resources and spaces. Far too little economic decision-‐making fully accounts for the exhaustibility and scarcity of natural resources or the harmful nature of pollution. Factoring environmental concerns into economic growth requires the following: identifying and measuring shared assets, as well as the potential negative impact on them of pollution or deliberate transformation; delineating rights and responsibilities associated with those assets; and fostering mechanisms for enhancing their value6. Many of China’s existing economic institutions grew out of the late-‐1970s market reforms and facilitated vibrant local and national market activity. For example, migration and reform of workers’ rights enabled the creation of a mobile national labor market, from which growing cities could expand their workforces. Similarly, land privatization stimulated property-‐market development. Ongoing reforms aim to establish and improve institutional infrastructure in natural resources and finance, with increased attention now also being paid to reforming social and environmental rights. Where it functions well, China’s evolving governance structures create complex dynamics of accountability for all layers of government, benefiting business and households economically, socially and environmentally. The converse can also occur. So, how does it work? 2.1.3
Centrally guided growth engines The nature of China’s state and its interaction with markets is built on a framework of centrally guided competitive local autonomy7. Xu Chenggan calls 5 According to American legal theorist Wesley Hohfeld, rights that are claimed must be supplemented by duties to provide the content of such rights. See Hohfeld (1913) 6 Following Coase (1960) 7 Political scientists debate how to describe China’s governance structure. We acknowledge that debate, without participating, since our purpose is applied, not theoretical, political science C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 13 it “a regionally decentralized authoritarian system” and considers it to be the fundamental institution of China’s reform and development (2011, p. 1076). Although China’s basic tiáo-‐kuài governance matrix has similarities in any modern state, it seems inexplicable to many Westerners. Indeed, it changes so rapidly that a proper understanding of the country’s growth necessitates an examination of its institutional evolution. China’s economy is neither monolithic nor chaotic. To appreciate its complexity, consider how the National Audit Commission (one of dozens of central agencies) assessed local-‐government financial conditions in June 2013. Some 55,400 staff pored over the accounts of central-‐ and local-‐government agencies, including those of 31 provinces and autonomous regions, five centrally affiliated municipalities, 391 cities, 2,778 counties and 33,091 rural communities. In all, they audited 62,215 government departments and agencies, 7,170 LGFPs, 68,621 public-‐finance-‐supported reporting units, 2,235 public business units and 14,219 miscellaneous entities. The project also entailed checking the books of 730,065 public-‐sector projects and examining 2,454,635 items of public-‐
sector debt. The resulting tally of total public-‐sector direct debt was RMB20.7 trillion (USD3.3 trillion or 36.4 percent of GDP), excluding RMB2.9 trillion of guarantee obligations and RMB6.7 trillion that may require assistance. As a whole, these public institutions form China’s governance ecosystem, driving an economy in which many local governments act almost like SOEs. China’s bureaucracy, with its many layers of government and quasi-‐government institutions and their often competing interests, is a vast hierarchy of interwoven, multi-‐tiered regional governments and centralized, vertical governance8. This is all ordered by a unique model of centrally guided competitive local autonomy from which emerges a structured institutional evolution that is the fundamental driver of the economy. The country’s reform process is typically described in Deng Xiaoping’s words as “cross the river by feeling the stones” (mōzhe shítou guòhé 摸着石头过河) or, to use another of his phrases, “try and see” (shi yi shi, kan yi kan 试一试，看一看). At the national level, the party and central government set development goals, prioritize policies and superintend government agencies as they pursue their five-‐year-‐plan targets. Local governments are encouraged to experiment within the context of national reform priorities and supervised by the party’s vertical bureaucracy. 8 Xu, 2011; Li, 2013. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 14 This form of central-‐local relations is fundamental to the evolution of China’s institutions, which incentivizes government behavior that, in turn, motivates and regulates the market. The interactions between lines and silos of central control (tiáotiáo9) and blocks and levels of regional jurisdiction (kuàikuài) create centrally guided local growth engines – a matrix depicted in Figure 2.3. Figure 2.3 | China's tiáo-‐kuài governance matrix Source: FGI analysis China’s tiáo-‐kuài governance matrix is analogous to a franchise: the central-‐
government “franchisor” sets key standards; and the different layers of local-‐
government “franchisees” adapt these to local conditions. Revenue and spending responsibilities are divided among the levels of government through bargaining, contracting and party and administrative controls. The development of institutions in China is shaped by the complex tiáo-‐kuài interplay that creates an unusual combination of long-‐term policy commitment and institutionalized policy experimentation. However, this also creates challenges because institutions, by their nature, tend to regulate and constrain authorities. Nonetheless, reform has repurposed existing institutions, creating innovations that selectively absorb global best practices and develop foundations for growth. 9 Chinese occasionally repeats characters such as tiaotiao and kuàikuài. Readers may assume tiao and tiaotiao are interchangeable; likewise for kuài and kuaikuài. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 15 To reduce the political, economic and social risks of implementing policy in an environment without well-‐established institutions, the party and central government designate certain localities as testing grounds for reforms and policy options. As local officials experiment, the results are fed back to the center for analysis and integration into the policy-‐formulation cycle and have the potential to shape the development of national institutions. This competition between local jurisdictions, guided and constrained by central control, is at the heart of our institutional model of China’s political economy. The tiáo-‐kuài dynamics create the political friction that often improves institutions. The quality of those institutions, in turn, determines how efficiently private-‐sector markets operate. Given China’s geographic size and regional differences, this experimentation allows policies to be adapted to suit local conditions. Centralized authority brings cohesion to the system as a whole. This process can be described by the phrase “proceeding from point to surface” (Yóu diǎn dào miàn 由点到面)10. If the experiment succeeds, central authorities may adopt it at the national level. If it fails, the experiment can be halted, risks isolated and alternatives considered. Regular on-‐site assessments (diaoyan 调研), frequent training at party schools and the rotation of top officials between regions and central departments ensure constant feedback between Beijing and local jurisdictions. The four distinct but related components of China’s tiáo-‐kuài governance matrix are explained in more detail below. 2.1.4
Kuàikuài: The competitive market of local governments Local-‐government competition is crucial to China’s economic dynamism, complementing the usual market rivalry between firms. China’s institutional structure turns officials into policy entrepreneurs (or rent-‐seekers if the system is faulty). Local governments compete fiercely within existing institutional structures but also compete to reform them in their favor. There are several levels of kuàikuài. Steven Cheung defines seven such layers: national, provincial, city, xiàn, town, village and household11. Each has a contractual responsibility to the level above but not to other entities at their level. “Competition therefore occurs horizontally but not vertically. Entities bearing similar responsibilities compete … within the same layer” (Cheung, 2009, p. 63). 10 See Heilmann and Perry (2011) for an excellent discussion. 11 Households are not normally thought of as kuàikuài. Along with firms, they are usually referred to as dian (点) – microeconomic players linked by complex webs of contracts and social relationships. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 16 Officials compete for three key reasons. First, the bureaucratic-‐promotion structure motivates local officials to pursue economic growth. (That motivation has begun to change, as we discuss in section 3.3.4 on Foshan’s promotion criteria.) As they respond to local growth barriers using the policy tools at their disposal, they change the institutional status quo. One example is the implementation of well-‐defined property rights. Local-‐institutional quality is one way officials who are competing to attract workers and capital distinguish themselves from their rivals. Second, being associated with successful reforms is a good move for ambitious officials. Former Premier Zhao Ziyang’s rise was due in no small part to his close involvement with the household-‐responsibility system that helped transform China’s rural economy. More recently, Wang Yang’s promotion to Vice Premier in 2013 was helped by his association, while provincial party secretary, with the so-‐called Guangdong model policy package. Third, running a strong economy or presiding over successful reforms carry prestige and responsibility that are external to the promotion structure. Most of China’s economy is driven by local authorities adapting central policies. Importantly, they have considerable autonomy and latitude to experiment, taking their jurisdiction’s conditions into account. China’s officials have become policy entrepreneurs, competing to shape the reform agenda. This is a significant source of reform momentum and a key factor in the country’s sustainable growth model. Without it, China could easily become caught in what is lamentably known as the middle income trap12, with entrenched special-‐interest groups confounding growth. Competing local-‐government entities are both market participants (along with, say, SOEs, businesses and households) and drivers of institutional development. And cities, in particular, are where the greatest interaction between state and market occurs. Crucially, it is there that market challenges and needs can stimulate institutional innovation on a small enough scale to be politically acceptable and capable of implementation. The importance of local-‐government competition cannot be over-‐emphasized. It creates powerful incentives for and constraints on local officials, independent of 12 This term is problematic for two main reasons. First, it implies something special about middle-‐
income economics, which has no theoretical basis. Second, it implies that failure to develop from a middle-‐ to high-‐income economy is a specific problem. In reality, growth at every stage is difficult – and sustained growth even more so. As well, many of the problems that afflict middle-‐income economies can also be found in those with low and high incomes. We see little point in identifying growth challenges with income levels. If a country’s growth stalls, surely it is more useful to discover the real causes. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 17 but in addition to central (tiáo) control. The motivation to eschew rent-‐seeking and corruption in favor of helping markets improve productivity and create value is especially important because competition forces local officials to rely on markets for resources, capital and talent. Beijing also grants local officials responsibility and autonomy to promote growth, provide public services and enforce laws within their jurisdictions13. It incentivizes them to compete innovatively to deliver national-‐policy goals. Their success or otherwise is taken into account when promotions are decided. Governance is not the sole role of local governments. They are direct players in the economy – to a far greater extent than their Western counterparts14. They behave similarly to corporations but with a strong exposure to moral hazard. Although senior officials are rewarded for achieving strong local growth, the sustainability of their local balance sheets is rarely a constraint. As well as normal fiscal and off-‐budget revenues and expenditure responsibilities, local governments have significant assets (such as land, infrastructure, and local SOEs) and liabilities (the likes of bank loans and other debts). This corporate-‐style activity of local governments is a major concern to many economists (see Chapter 8). 2.1.5
Tiáotiáo: Lines and silos of central control Local government competition may be a key engine of China’s economic dynamism, but proper supervision and direction is equally fundamental. This is the role of tiáotiáo institutions, which are a principal means of central control. Figure 2.4 depicts five such tiáotiáo: policy-‐making and administration; party control; national planning; fiscal relationships; and market regulation. We introduce the first three of these here but leave fiscal and market issues to later. 13 Since the mid-‐1990s, the central government has begun selective re-‐centralization. This includes tax reforms that dramatically increase its share of total revenue and restructuring that weakens local-‐government influence on bank operations in their jurisdiction. However, it has not altered the basic framework of decentralized economic governance (see Zheng, 2007, and Shi, 2013). 14 Lin et al, 2006; Zheng, 2007; Xu, 2011. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 18 Figure 2.4 | Tiáotiáo: Lines and silos Source: FGI analysis Policy-‐making: Central influence over economic conditions is achieved in part by the setting of macro policy. As in other countries, China’s financial regulator directly controls benchmark interest rates. Globalization and international capital flows complicate the process, leading to arbitrage opportunities between countries’ rates. This poses a dilemma for China. It needs to liberalize cross-‐
border capital flows and interest and exchange rates to sustain development. However, this raises the risk of asset bubbles if implemented under distorted benchmark prices such as the zero-‐interest rates of many advanced economies. Getting prices right is a challenge for both state and market – one that stirs significant controversy even in advanced economies. Party Control: Party control of officials is a major steering mechanism. The Organization Department is responsible for key appointments throughout government and motivates officials to compete to implement party objectives. How they do so is largely left to them, but the general direction is set by Beijing. The increasingly influential Central Commission for Discipline Inspection (CCDI) provides another major line of control, by which officials who stray too far can be brought back into line. Planning: China’s nested planning process is the principal mechanism for communicating what are typically – and intentionally – vague central-‐policy objectives. First, Beijing announces a five-‐year plan. That for 2016-‐20, for example, will be unveiled in 2015. Each province is then required to develop its own version, in consultation with the National Development and Reform Commission, detailing how it will implement the national plan. Next, each city or municipal government C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 19 develops a strategy, in consultation with provincial officials and approved by the State Council, for supporting the provincial plan. City plans are typically the most specific and action-‐oriented. Indeed, some include criteria for evaluating the performance of officials and/or the success of local investment projects. Officials who successfully implement policies that support national objectives are most likely to be promoted within government and party ranks. This nested planning system also facilitates local pilot projects – the sometimes bold policy experiments that may be too politically or economically risky to implement nationally. These may be initiated by the central government or emerge as local or provincial initiatives. 2.1.6
Centralization and localization: Dual forces of change Centralization and localization occur simultaneously throughout China’s economy and society. Consider the ongoing anti-‐corruption drive launched in 2013 under the auspices of the CCDI. On the one hand, this is clearly an example of central control (tiáotiáo). Institutionally, however, it is simply one aspect of dual-‐driver change, whereby centralization and localization are concurrent. Localization empowers regional officials (kuàikuài) to bolster the stocks of their jurisdiction and/or their personal standing by experimenting with policy and competing in terms of reforms and other measures. Centralization enables Beijing to rein in those same local officials if they are seen to be moving too far from central policies by the use of tighter control and increased discipline. Thus, centralization typically results in slower economic growth and dampens local-‐government enthusiasm. Risk-‐averse officials may prefer to do nothing than be adversely noticed. However, once central authorities have restored control, local officials are more likely to enact policy reform and drive economic plans. Thus, governance change results from the dual-‐driver dynamics of centralization control and localization experimentation. 2.1.7
Tiáo-‐kuài interaction Centrally guided local competition does not always lead to productivity gains and value creation. The tiáo-‐kuài dynamics have also encouraged such problems as pollution and over-‐investment. Across an economy as diverse as China’s, it makes sense for regions to pursue different development strategies. However, the strong tiáo influence over local-‐government decisions can result in economic activity being driven by bureaucratic objectives that may be at odds with market C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 20 efficiency. This is a cost of China’s system, although it is not yet clear how onerous a price it is. Central objectives have a major impact on the allocation of many factors of production, especially land, energy and finance. Market forces largely determine the allocation for others such as labor and intermediate goods and services. These market participants or dian (点), now have considerable opportunities to choose where to invest, operate, work or live. Despite some policy constraints, their ability to “vote with their feet” is a major spur for local governments to perform. In places where governance structures function poorly, capital and investment may be forced to follow bureaucratic objectives, while people and businesses pursue market objectives. One notable consequence has been the construction of so-‐called ghost cities. Such outcomes may be inevitable during periods of rapid institutional transition. After all, institutions do not all improve at equal rates and so incentive mechanisms governing different factors of production may not align perfectly at such times. Importantly, the effects of growth are not solely economic. We also highlight economic, social and environmental consequences (Figure 2.5). Living standards cannot rise without increased productivity. However, without social inclusion, greater productivity is of little benefit to most people and jeopardizes the legitimacy of future reforms. Similarly, pollution and other health hazards endanger society and the economy itself: natural habitats may be lost; the global climate may be degraded; and assets as valuable as entire cities or farming regions may be put at significant risk. A narrow focus on GDP growth clearly misses much of value. Balance is crucial between economic efficiency, environmental sustainability and social justice/political stability. This is a multi-‐dimensional and complex task. The Foshan Story reveals aspects of why and how China has begun changing its development priorities in favor of social and environmental priorities. However, there is scope for far more improvement (Figure 2.6). Some negative consequences of narrow GDP-‐targeting such as pollution, unsafe food and energy inefficiency have persuaded the central government to seek broader measures of local-‐government success. Thus, for example, Shanghai did not even include a GDP target in its 2015 work report, while Foshan has adopted wide-‐ranging reform metrics in its latest five-‐year plan (see Chapter 3). As China continues its institutional development, driven by tiáo-‐kuài interactions, the balance of positive and negative outcomes will continue to evolve. The Foshan Story examines the history of what this process had produced in the city, providing a local context to help develop a more objective, balanced and true understanding of how China works. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 21 Figure 2.5 | Consequences of growth Source: FGI analysis Figure 2.6 | China's evolving development priorities Source: FGI analysis 2.1.8
Structure of this report Cities are where state and market forces interact most directly. As such, they offer key insights into patterns of growth, future risks and opportunities. They are the building blocks of nationally and globally integrated economic, social and environmental systems. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 22 Since 1978, China’s cities have become more autonomous, especially in terms of economic planning and management. Indeed, during the 1990s and 2000s, local governments became economic entities. In addition to their social and governance responsibilities, they were granted autonomy over clearly defined assets and liabilities (increasingly through LGFVs), typically for local infrastructure projects. China’s municipal cities encompass more than 300 autonomous entities that behave similarly to small city states in terms of economic management, with significant control over land. They compete fiercely for infrastructure construction, industrial projects, capital, energy and talent to pursue urbanization and industrialization. Today’s globalized market drives the convergence of cities in terms of lifestyle, infrastructure and production capacity. However, regulations, policies and institutions are still set and implemented locally for the most part, in cities with diverse histories, cultures and politics. Thus, it is important to understand how cities grow while dealing with the dynamics of convergent market forces and such varied influences. Cities are where market participants or dian operate under local institutions and conditions, even if they transact business in national and global markets. Cities allow businesses and households to be increasingly active and free agents of growth, spurring local and central governments to be more accountable in economic, socio-‐political and environmental terms. Increasingly, these dian are seeking better business and personal opportunities outside China. As key arenas for state-‐market interactions, cities are a critical element of China’s evolving growth model. Through the “hardware” of physical infrastructure and the “software” of governance and an infrastructure of rights, cities drive economic growth, create social networks and affect delicate envrionmental balances. Thus, studying cities helps us understand the local experience of emerging growth paradigms – an understanding that is needed to achieve a sustainable balance among people, profits and our planet. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 23 3 F O S H A N A N D 1 5 O T H E R P I O N E E R C I T I E S The diversity of China’s economy is typically illustrated by its rural-‐urban inequality. Less well-‐known is the massive contribution of just 16 pioneer “super” cities among the country’s total of more than 300. These cities, each with over five million people by 2012 and GDP above USD100 billion15, are home to 12 percent of China’s population yet produce 30 percent of its GDP (see Figure 3.1 – up from 20 percent in 1991. Their per capita GDPs rank them in the World Bank’s top-‐tier high-‐income category (defined in 2012 as being more than USD12,616). Per capita GDP for Wuhan, for example, although the lowest of the 16 cities in 2012, was nonetheless almost double the national average. Figure 3.1 | Sixteen “super” cities’ share of China’s GDP (2012) Shenyang 1% Changsha 1% Ningbo 1% Foshan 1% Dalian 1% Nanjing 1% Qingdao 1% Wuxi 1% Hangzhou Wuhan 2% 2% Suzhou 2% Tianjin 2% Shenzhen 2% Guangzhou 3% Beijing 3% Other 69% Shanghai 4% Source: CEIC The divergence of these 16 cities from the rest of the country raises the obvious question: Why? Are they intrinsically different, for example, or did they pursue better strategies? Clearly, some are unique. After all, there can be only one Beijing and one Shanghai. And Shenzhen has had the benefit of different rules. 15 Other Chinese cities also have high per capita incomes but much smaller populations; yet others boast at least as large overall GDPs but much larger populations. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 24 But most are fairly typical of large Chinese cities. Thus, we argue that their experiences provide potentially useful lessons for other parts of the country and offer critical insights into China for the rest of the world. We chose Foshan as the subject of our detailed case study because it has been in the vanguard of China’s reforms, making it a particularly apt exemplar of the role local governments play in the country’s growth strategy. Table 3.1 | China's 16 high-‐income cities with large GDPs and populations Per capita GDP (USD) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Shenzhen Wuxi Ningbo Suzhou Hangzhou Guangzhou Dalian Tianjin Foshan Changsha Nanjing Beijing Shanghai Qingdao Shenyang Wuhan China GDP (USD billion) 19,781 18,836 18,307 18,301 17,937 16,998 16,519 14,954 14,647 14,429 14,208 14,040 13,702 13,270 12,917 12,757 Shanghai Beijing Guangzhou Shenzhen Tianjin Suzhou Wuhan Hangzhou Wuxi Qingdao Nanjing Dalian Foshan Shenyang Ningbo Changsha 6,166 China 324 287 217 208 207 193 128 125 121 117 116 112 106 106 106 103 Population (thousand) Shanghai Beijing Tianjin Guangzhou Shenzhen Wuhan Qingdao Hangzhou Nanjing Ningbo Foshan Shenyang Changsha Suzhou Wuxi Dalian 8,337 China 23,804 20,693 14,132 12,839 10,547 10,120 8,869 8,802 8,161 7,639 7,262 7,248 7,147 6,478 6,465 5,903 1,354,040 Source: CEIC 3.1
CITIES: W HERE PEOPLE, FIRMS A ND G OVERNMENT INTERSECT We focus on cities for three key reasons: Beijing regards urbanization as central to national development; economic geography identifies cities as sources of efficiency; and in China they are key administrative and policy units. A wide range of studies has tried to determine the key drivers of cities’ growth, notably in terms of urban economics, economic geography, economic growth and development and institutional economics. These typically focus on the development and sustainability of specializations, the accumulation of human capital and changes in institutional structures. Economic specialization is both a major cause and effect of urbanization. In recent years, economists have provided powerful explanations for the spatial concentration of economic activities (Fujita, 2002, Krugman, 1991). For example, endogenous and sustainable increases in efficiency resulting from the C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 25 concentration of economic activity in a particular city (such as financial services in London) can outweigh the high cost of doing business there. Further, these economies of agglomeration can continue for a long time. Cities allow more innovative sectors to earn rents in the short-‐to-‐medium term and provide more resources for re-‐investment to prolong technological advantages. However, as cities face external change and competition, they must overcome challenges such as sector upgrading and succession. Detroit’s bankruptcy is an example of what can happen if a city fails to do so. Accumulating human capital, typically through migration and training, is also critical for a city’s development. Knowledge of all sorts can increase productivity and add to the stocks of human capital (Rosen, 1983). And it can come from a variety of sources, including education, research and development and even incentives to apply and exchange information (Romer, 1990). Indeed, as Lucas has observed (1988), skilled people choose to live in expensive cities, in part, to be near their own kind. A third key factor of economic development suggests that institutions determine long-‐term growth (Acemoglu, Johnson and Robinson, 2004; Rodrik, et al, 2004; Rodrik, 2007). Regional-‐development studies (Saxenian, 1994; Becatinni, 1990) have focused on sector-‐specific institutions that help promote a particular industry. But more broadly, institutions can shape microeconomic and other environments. It is here that the public and private sectors interact. Households work and learn, businesses operate and governments maintain order, encourage growth and solve problems (Person and Tabellini, 2006; Glaeser, et al 2004). 3.2
FOSHAN The city of Foshan lies at the heart of one of China’s most fertile deltas, across the Pearl River from the Guangdong provincial capital of Guangzhou. It is one of 16 reform-‐pioneering “super” cities and has a long history of international trade, diasporas, ceramics and martial arts. (Foshan is the ancestral home of many leading business figures in nearby Hong Kong; it was also the birthplace of Yip Man, the sifu of martial-‐arts marvel Bruce Lee.) Today, Foshan is a powerhouse, with some 7.3 million people and a GDP of more than USD100 billion. The city is an exemplar of both the achievements and challenges common to China’s emerging metropolises. Among the factors in Foshan’s success has been its geographic proximity and ties of kinship to the Special Administrative Region of Hong Kong. This was a significant advantage at the outset of China’s reform era. The city’s officials, business leaders and even householders were able to leverage these connections to help them devise relatively market-‐oriented solutions to economic problems within the limits of central directives. Indeed, they were encouraged to test the C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 26 boundaries of national policy to achieve the central government’s key priority of economic growth. Map 3.1 | Foshan's location in Guangdong Province, Southeast China Source: Herr Klugbeisser, Wikimedia Commons; FGI 3.3
DEVELOPMENT O F FOSHAN’S A DMINISTRATIVE S TRUCTURE Tracing Foshan’s historical development brings to mind Theseus’s Paradox, which questions whether a ship of which every part has been replaced remains the same vessel16. Modern Foshan comprises the five districts of Chancheng, Shunde, Nanhai, Sanshui and Gaoming, each of which has at times been an independent cities or county with its own history and identity extending back thousands of years. Foshan underwent major administrative reorganizations in 1992-‐1994 and 2002. Each time, it was granted greater authority over its neighboring areas, with the aim of creating a major metropolis. China’s cities are part of a bureaucratic structure with clearly defined relationships between various officials and departments. Foshan is a municipal 16 Centuries before, Guatama Siddartha had, in effect, answered this question Plutarch raised in his Life of Theseus by concluding that it both was and was not. The Buddha’s Second Universal Truth states that everything is permanently changing, giving the example of a river: it remains the same even as the moving water that is its essence is constantly replaced. Readers may be interested to learn that Foshan means “Buddha hill”. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 27 city, so its officials generally rank half a level below those of vice-‐provincial cities17 but one above district officials. China has 15 vice-‐provincial cities, 10 of which are provincial capitals and the rest “municipalities with independent economic management authorities”. Officials such as party secretaries, mayors, Chinese People's Political Consultative Conference chairs and National People’s Congress directors typically hold vice-‐provincial rank. As well, party secretaries of vice-‐provincial cities are usually members of the provincial standing committee. Above these cities are provinces, the four provincial-‐rank cities of Beijing, Shanghai, Chongqing and Tianjin and central-‐government departments. Governors are the most senior provincial-‐level officials, second to provincial party secretaries. Below vice-‐provincial cities are municipal-‐city districts of and county-‐level cities. Their officials usually rank one level below those of municipal cities18. Thus, the amalgamation of Chancheng, Shunde, Nanhai, Sanshui and Gaoming into Foshan’s administrative structure was a delicate process. It was left to the Foshan city and Guangdong provincial governments to negotiate a compromise. Ultimately, the five retained their boundaries, names, and some degree of fiscal independence and planning autonomy, but lost their relative ranks. Historical, administrative and economic legacies mean Foshan continues to exist as a multi-‐center city. Its reorganization is an ongoing process – part of its pursuit of greater urbanization in keeping with national-‐development objectives. The creation of a larger administrative unit has also helped facilitate regional projects such as the Guangzhou-‐Foshan railway line (see Chapter 7). 3.3.1
Reorganization from rural counties to county cities (1992-‐1994) Between 1992 and 1994, the counties of Nanhai, Shunde, Sanshui and Gaoming were redesignated as county cities. The following are the major administrative differences between the two administrative levels. 1.
Both have equal authority and autonomy in areas such as fiscal management, planning and land use. If a county achieves specific economic and social standards, it may qualify for the next level of economic and social development as a county-‐level city. 17 Party secretaries and mayors of some important municipal cities (such as Suzhou’s party secretary) carry vice-‐provincial rank. 18 Party secretaries of some important districts may rank half a level above their counterparts. Those of Shunde and Chancheng, for example, are members of Foshan’s standing committee.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 28 2.
Because counties were initially mainly rural, they typically focus on developing agriculture, with some supplementary secondary township and village industry and services. County cities typically focus on tertiary industry. Thus, county-‐government departments tend to be mainly agriculture-‐related, while those of county cities are more concerned with urban and public management. 3.
County cities can impose taxes for urban maintenance and construction, whereas counties cannot. 4.
County-‐city party secretaries may be members of their municipal city’s standing committee – a rarity for their county counterparts. 5.
County cities adopt city standards of urban planning such as wider roads. 6.
Provincial governments’ relationships with those of counties or county cities can vary, but management control of either may be assigned to the city government if they are municipal districts. 3.3.2
Reorganization from county cities to municipal districts (2002) In 2002, Nanhai, Shunde, Sanshui and Gaoming were redesignated as districts of Foshan, along with the creation of the new district of Chancheng, run directly by the municipal government. Table 3.2 compares the institutions of municipal-‐city district-‐level governments with those of county cities and counties. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 29 Table 3.2 | Comparison of municipal-‐district and county-‐level governments Municipal district County/County-‐level city Independence Weak Strong Autonomy Weak Strong Administrative level Equal to head of municipal-‐
government department; party secretaries of some important districts may be promoted to their city’s standing committee Equal to head of municipal-‐
government department; party secretaries of some important counties may be promoted to their municipal city’s standing committee or become vice mayor Administrative subordination Municipal-‐city government Provincial or municipal-‐ city government Focus Urban construction and tertiary-‐industry development County-‐level city: Urban construction and tertiary-‐
industry development County: Primary industry plus supplementary secondary and tertiary industry Subordinate administrative unit Residential district Towns and villages Integration with municipal city High Low Urban-‐construction planning Municipal government Independent Planning Municipal government Independent Land management Municipal government Independent Fiscal institutions Remit high portion of revenue to municipal government Retain high portion of revenue Social-‐security standards High (usually adopt same as for urban resident, with aim of rural-‐urban integration Low Cultural institutions Urban County-‐level city: Urban County: Rural Source: Cheng (2011) The table shows that the authority and autonomy of county-‐level governments are constrained once they are reorganized as municipal districts. For example, districts remit larger percentages of revenue to the municipal government than do counties, so they have less fiscal independence and less autonomy in urban planning and land management. Thus, county-‐level governments are usually opposed to being redesignated as districts, as seen by the protests in Changxing, Huzhou Province, in 201119. Such amalgamations are a key national priority because increased urbanization improves overall living standards. Foshan negotiated a compromise by allowing 19 http://www.infzm.com/content/90408 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 30 the local governments a measure of autonomy and independence during a long transition. Similarly, the Ningbo municipal government allowed Yinzhou to retain economic, fiscal and social-‐management authority as part of its redesignation from county to district (Cheng, 2011). Table 3.3 | Institutional comparison: Nanhai, Shunde, Sanshui and Gaoming versus Chancheng (2002 to present) Nanhai Shunde Sanshui Gaoming Chancheng Fiscal management Independent Independent Independent Independent Municipal government Administrative level Party secretary is member of Foshan’s standing committee Party secretary is member of Foshan’s standing committee Party secretary ranks with head of municipal department Party secretary ranks with head of municipal department Party Secretary is member of Foshan’s standing committee Economic & social planning Independent Independent Independent Independent Municipal government Land-‐resource management Independent Independent Independent Independent Municipal government Source: FGI analysis The Foshan municipal government did not unilaterally decentralize authority to the district governments during the 2012 reorganization. Their considerable independence and autonomy (excepting Chancheng) was a result of vigorous negotiations with the Foshan municipal and Guangdong provincial authorities. Fiscal relations of Foshan’s districts County-‐level governments, like their municipal counterparts, operate under a so-‐called first-‐level fiscal system, which allows them control over their own budgets. However, those of the district level operate under a half-‐level system, which requires their budgets to be either authorized by their municipal government or fall within its overall budget. Since fiscal power is one of the most important sources of authority, county-‐level governments are understandably reluctant to surrender it. That is why Foshan agreed to allow Shunde; Nanhai; Sanshui and Gaoming a high degree of fiscal autonomy, in exchange for their agreement to be redesignated as districts. Development plans Similarly, county-‐level governments have autonomy to make their own development plans, although these must be approved by the municipal government. The local governments must follow their municipal city’s overall plan. It, in turn, must follow that of the province, which supports the national C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 31 strategy. However, local governments are able to participate in and comment on their municipal city’s planning. Thus, the planning departments of Shunde, Nanhai, Sanshui and Gaoming are now formally under the Foshan municipal planning department’s jurisdiction. In practice, this means the districts formulate their own development plans but must submit them to the Foshan authorities. In institutional-‐analysis terms, the districts set the agenda, with the municipal government exercising a right of veto (Tsebelis, 2001). Land management County-‐ and district-‐level governments make their own land-‐use plans, with their quotas controlled by the municipal authorities. Administratively, county-‐
level governments are responsible for their own requisition, supply and land-‐use decisions. At the district level, these are usually directly controlled by the municipal government. Shunde, Nanhai, Sanshui and Gaoming retain more autonomy than normal. Although their land-‐use plans must be approved by the Foshan authorities, management is relatively independent. 3.3.3
Foshan’s urbanization: A multi-‐center city Foshan’s rapid growth during the first 15-‐odd years of the reform era was due in large part to an SME-‐led explosion in economic activity across its counties. The success of Shunde, Nanhai, Sanshui and Gaoming led to their redesignation as county-‐level cities. Together with Foshan’s urban area, these fast growing county cities then followed a transitional multi-‐center development pattern. Each retained its own economic clusters and urban planning. However, in keeping with national objectives, Foshan’s longer term aim has been to pursue greater urbanization levels such as those achieved by Shenzhen. Thus, in 2002, Foshan reorganized its administrative structure from two districts and four county cities into five municipal districts. This reflects a new trend in regional competition. Just as companies become multinational players via mergers and acquisitions, China’s cities are being encouraged to form competing mega-‐regions via amalgamation and urbanization. Foshan is currently negotiating with other Pearl River Delta cities, notably the provincial capital of Guangzhou, to form what would be a massive economic powerhouse. Foshan’s urbanization strategy includes the following key features: 1. A high degree of independence and autonomy for most of its districts, especially in terms of fiscal management, planning and land use. This is partly for historical, administrative and economic reasons, as well as being a tradeoff to secure their support for urbanization-‐driven restructuring. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 32 2. A continuation of its multi-‐center development strategy, with gradual implementation of further integration. This approach promotes internal competition at the cost of some economies of scale. 3.3.4
Performance evaluation criteria for Foshan officials Foshan’s 12th Five-‐Year Plan includes performance-‐evaluation criteria for the city’s officials (see Table 3.4) The broad range of measures gives the lie to the accepted wisdom that economic growth is the sole or even dominant yardstick of success. Indeed, GDP accounts for only 5 percent of the total, while environmental protection accounts for 9 percent. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 33 Table 3.4 | Foshan performance management guidelines Primary Secondary Economic growth (5%) Industrial upgrading (12%) Economic development (31%) Technological innovation (8%) Developmental outcomes (6%) Upgrading (8%) Management (2%) Urban development (19%) Environmental protection (9%) 1. GDP growth (5%) 2. Input/output ratio (3%) 3. Industrial optimization index (3%) 4. Industrial supply chain targets (3%) 5. Private sector value-‐added growth rate (3%) 6. Innovative-‐city development index (4%) 7. Information development index (4%) 8. Income development index (2%) 9. Local public-‐revenue growth (2%) 10. Tax-‐revenue growth (2%) 11. Urban-‐upgrading three-‐year-‐plan completion rate (8%) 12. Urban management index (2%) 13. Fiscal expenditure and environmental-‐protection investment (2%) 14. Resource consumption index (2%) 15. Emissions reduction (2%) 16. Garbage treatment (3%) 17. Education modernization (2%) 18. Health development index (2%) Objective criteria Public services (10%) Social development (25%) Public safety (8%) Democracy and rule of law (3%) Social integrity (4%) Managerial innovation (4%) Governance development (15%) Discretionary evaluation Tertiary Social assessment (10%) 19. Cultural development index (2%) 20. Social-‐security development index (2%) 21. Transport and community infrastructure development index (2%) 22. Public safety index (4%) 23. Peaceful Foshan index (4%) 24. Democracy & rule of law index (3%) 25. Credit-‐system construction (2%) 26. Market-‐supervision-‐system construction index (2%) 27. Managerial innovation index (4%) 28. Openness of information (2%) Administration by law (7%) 29. Significant reduction in administrative negligence (2%) 30. Honest government index (3%) Administrative costs (4%) 31. Costs as share budget (2%) 32. Public-‐finance transparency (2%) Service satisfaction (10%) 33. Social satisfaction index (10%) Source: Foshan performance management guidelines C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 34 3.4
FOSHAN’S G ENERAL ECONOMIC SITUATION In 2013, Foshan’s GDP surpassed RMB700 billion (RMB96,535 per capita), with official unemployment at 2.26 percent (China Knowledge, 2014). Its economy has grown at an average annual rate of 17 percent in real terms since 1979. For the most part, this pace has been consistent, albeit with some fluctuations such as in 1989, when the entire country’s economy practically came to a standstill. As Figure 3.3 shows, real GDP growth collapsed to 1 percent that year, before rebounding to 39 percent in 1992 and then reverting to trend by the late 1990s. Overall, though, real-‐GDP growth has been strong and stable. Nominal growth has been more turbulent, reflecting periods of high inflation, especially during the 1980s. However, the converging trends of nominal and real GDP growth suggest local inflation has declined over time. The persistence of Foshan’s real GDP growth around 17 percent for some 35 years is remarkable. Even more impressive is the trend towards more stable (not slower) growth – no more than three points off 16 percent for 15 consecutive years since 1996, except 1999, when it fell to 10 percent. Breakdown of Foshan’s GDP by expenditure Changes in Foshan’s expenditure patterns (see Figure 3.3) are of use in understanding its historical growth. Household consumption: Although largely unchanged at about 30 percent since 2001, household consumption’s contribution to GDP is down from 40 percent in 1996 and low by national standards. We hypothesis that Foshan’s migrant workers, who account for about half the total population, may have less ability or propensity to consume locally than do its permanent urban residents. Government consumption: We highlight three features of Foshan’s government consumption (see Figure 3.4) First, between 2004 and 2008, it practically froze, despite continued local growth. This resulted in its collapse relative to GDP from 14 to 5 percent over that period, equating to a 64 percent fall in real terms. From 2006 to 2007, consumption fell substantially even in nominal terms. Second, government consumption soared over 2008-‐2009, increasing by 71 percent. This was a clear outlier and most likely a reflection of China’s massive stimulus response to the global financial crisis. Growth soon returned to 20 percent per year and trending towards normal. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 35 Percent Figure 3.2 | Foshan’s real-‐ and nominal-‐GDP growth & trends (1979-‐2013) 50 45 40 35 30 25 20 15 10 Nominal GDP Real GDP Linear (Nominal GDP) Linear (Real GDP) 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 0 1979 5 Source: Foshan statistical yearbooks (2010-‐2012); Foshan Annual Report on Economic and Social Development (2013) percent Figure 3.3 | Foshan’s GDP by expenditure (1996-‐2011) 100 80 60 40 Household Consumption Fixed Capital Formation Net Export Government Consumption 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 0 1996 20 Inventories Source: Foshan statistical yearbooks (1999-‐2012) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 36 20 60 50 Percent Billion RMB Figure 3.4 | Foshan government consumption by value and share of GDP (1996-‐2010) 15 40 10 30 20 5 RMB, billion 0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 0 1996 10 Share of Foshan GDP (%) Source: Guangdong statistical yearbooks (1997-‐2011) percent Figure 3.5 | Foshan government consumption YoY growth (1997-‐2010) 80 60 40 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 0 1997 20 -‐20 -‐40 Source: Guangdong statistical yearbooks (1998-‐2011) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 37 Third, year-‐on-‐year growth of government consumption is volatile. Typically, most such consumption is due to salaries for public servants, teachers, hospital staff and providers of recurring services. The wide fluctuations in Foshan’s expenditure suggest the inclusion of other items. Fixed-‐capital formation: By contrast, both private and public fixed-‐capital formation have remained remarkably stable at about 30 percent of the city’s GDP. From 1997 until China joined the World Trade Organization (WTO) in 2003, fixed-‐capital formation accounted for 25 percent of total expenditure. From there, it rose to 35 percent until the onset of the global financial crisis, when it fell to 30 percent. The higher 2003-‐2008 investment period reflects the demand for manufacturing capacity during China’s export boom. Declining inventories: We attribute the big fall in inventories as a share of expenditure from 18 percent in 1998 to 4 percent in 2011 to the city’s increasing supply-‐chain sophistication. However, changes in taxation or other policies may have affected inventory decisions in ways we have not identified. Net exports: Foshan is well integrated into the global economy, although the likes of Shenzhen, Shanghai and Suzhou export four to seven times more by value. Like all Chinese exporters, Foshan was hit hard when external demand vanished in 2008. Its exports dropped almost 15 percent that year, from more than USD28 billion to USD24 billion by 2009 (CEIC). percent Figure 3.6 | Ratio of exports to industrial output (Foshan 2000-‐2010) 40 35 30 25 20 15 10 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 5 Source: CEIC and Foshan statistical yearbooks (1999-‐2011) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 38 Although industrial output continued to climb, Figure 3.6 shows that the proportion exported declined heavily, from 34 percent in 2004 to a low of 14 percent in 2009. While the export of goods relative to both GDP and industrial output fell from 2004, net exports of services were negative between 2002 and 2007 (see Figure 3.7). An increasing share of industrial output has been for the domestic market. It remains to be seen if this trend has been reversed since the global financial crisis, but the data suggest a shift in Foshan’s export structure from goods to services and from export markets to local consumers. Accurately measuring the trade in services, especially at the city level, is difficult as it is not possible to identify the major components of these exports from macro statistics. These trends may be a result of Foshan firms turning to services as they struggle to remain globally competitive amid rising cost bases. An example of this is the government’s development of large logistics-‐support bases in the new Foshan financial-‐services industrial park, where global banks such as HSBC have built data centers. Percent Figure 3.7 | Foshan net exports of goods and services as share of GDP (1996-‐2011) 80 70 60 50 NX/GDP 30 Ex of Goods/ GDP 20 NX of Goods/ GDP 10 NX of Services/GDP 0 -‐10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 40 -‐20 -‐30 Source: Guangdong statistical yearbooks (1997-‐2012); Foshan statistical yearbooks (1999-‐2012) We expected GDP by expenditure to provide a relatively straightforward and accurate account of macro changes in the economy. However, there are several uncertain areas in Foshan’s accounts and further analysis requires greater transparency. Trends for GDP by production offer some insights. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 39 Breakdown of Foshan’s GDP by production Foshan’s sector mix on the production side also highlights a novel economy. What particularly stands out is industry’s dominance of the tertiary and primary sectors (see Figure 3.8). Industry: Foshan and its neighboring cities of Guangzhou and Shenzhen each has a distinct structural composition. The one common feature is that agriculture no longer accounts for a significant share of total output. When the reform era began in 1978, Guangzhou was the most industrial of the three, with its secondary sector accounting for 60 percent of output, compared with 50 percent for Foshan and just 20 percent for Shenzhen. From that time, Guangzhou’s services sector expanded rapidly, displacing industry by the early 1990s. In Shenzhen, industry also grew quickly, matching services. However, in Foshan, industry expanded at such a pace that it complete dominated the other two sectors and was contributing almost two-‐thirds of output soon after China’s WTO entry in 2003. Foshan’s industrial-‐output growth is the main focus of the next chapter. But it is important to put this into a regional context. Guangzhou and Shenzhen are better placed to become regional services-‐sector centers that can directly provide most of Foshan’s industrial-‐development needs. percent Figure 3.8 | Foshan's GDP by industrial sector (1978-‐2011) 70 60 50 40 Primary 30 Secondary Tertiary 20 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 1978 10 Source: Guangdong statistical yearbooks; China statistical yearbooks C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 40 percent Figure 3.9 | Guangzhou’s GDP by industrial sector (1978-‐2012) 70 60 50 40 Primary 30 Secondary Tertiary 20 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 1978 10 Source: Guangdong statistical yearbooks; China statistical yearbooks percent Figure 3.10 | Shenzhen’s GDP by industrial sector (1979-‐2012) 60 50 40 Primary 30 Secondary 20 Tertiary 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 0 1979 10 Source: Guangdong statistical yearbooks; China statistical yearbooks Services sector: In 1978, services produced just 18 percent of Foshan’s output. This soared to 42 percent in 2003, before dropping to 35 percent in 2007 (due mainly to the global financial crisis) and then rising again to 36 percent in 2013. However, the value of services output has continued to grow at a rapid pace, albeit volatile until 1995, with a peak of 55 percent. Since then, it has delivered more stable 10-‐20 percent annual growth without any contractions. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 41 By comparison, Shenzhen’s services sector accounted for 50 percent of GDP in 2007, 50 percent in 2008 and about 54 percent over 2009-‐2011. In Guangzhou, services delivered 58 percent of output in 2007, 59 percent in 2008 and then surpassed 60 percent over 2009-‐2011. Thus, Foshan does not have a strong tertiary industry, with its contribution to GDP below even the national average of 44 percent in 2011. This may limit its attractiveness for the highly skilled people needed for industrial upgrading and sustained development. Within services, “wholesale & retail trade” was the single biggest contributor for all three cities during 2004-‐2011. However, in Foshan, it narrowed from less than 10 percent in 2004 to less than 8 percent in 2011. Meanwhile, “real estate” almost doubled, from more than 3 percent to more than 6 percent over the same period, becoming the city’s second largest tertiary industry. “Financial services” grew from 2 percent to almost 4 percent; “transport, storage & postal” shrank from 6 percent to 2 percent; “leasing & business services” fell by half a percentage point to less than 4 percent; and “public administration & social organization” declined by the same amount to less than 2 percent. Table 3.5 | Foshan’s services sectors as percentage of GDP (2004-‐2011) Percent 2004 2005 2006 2007 2008 2009 2010 2011 Transport, storage &postal 6.4 5.7 5.2 5.0 3.3 2.9 2.8 2.3 Wholesale & retail trade 9.7 8.8 8.1 7.3 6.4 7.4 7.8 7.7 Financial services 2.1 1.0 2.2 2.6 3.5 3.4 3.3 3.7 Real estate 3.4 3.7 4.2 5.2 5.2 5.7 5.6 6.4 Leasing & business services 4.2 3.9 3.4 3.1 3.1 3.0 3.3 3.7 Public management & social organization 2.3 2.1 1.8 1.5 1.8 2.2 2.1 1.8 Education 1.8 1.6 1.4 1.3 1.6 1.7 1.8 1.8 Total services 39.0 36.1 34.8 34.7 33.9 35.0 35.4 35.8 Source: Foshan statistical yearbooks (2005-‐2012) In Guangzhou, the share of “wholesale & retail trade” rose from 10.4 percent in 2004 to 12.8 percent in 2011. In Shenzhen, it increased slightly from 10.4 percent in 2004 to 10.9 percent in 2011. “Real estate” reached 7.2 percent in Guangzhou by 2011 and 7.8 percent in Shenzhen. “Financial services” achieved 6.9 percent in Guangzhou that year and 13.6 percent in Shenzhen. “Leasing & business services” delivered 7.8 percent of Guangzhou’s GDP in 2011, making it the second largest services-‐sector contributor. The shares of “education” and C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 42 “public administration & social organization” were much higher in Guangzhou than either Shenzhen or Foshan. This is no surprise, given that the provincial capital is one of only a handful of cities, including Beijing and Shanghai, that are home to most of China’s major universities and research institutes. Table 3.6 | Guangzhou’s services sectors as percentage of GDP (2004-‐2011) Percent 2004 2005 2006 2007 2008 2009 2010 2011 Transport, storage & postal 10.8 11.0 10.9 10.3 7.6 7.1 7.0 6.7 Wholesale & retail trade 10.4 10.8 9.7 9.7 11.3 12.3 12.6 12.8 Financial services 3.9 3.9 3.9 4.8 5.4 6.0 6.2 6.9 Real estate 6.0 6.5 6.8 7.0 7.3 7.7 7.2 7.2 Leasing & business services 6.0 6.0 6.1 6.5 7.8 7.5 8.0 7.8 Public management & social organization 2.9 3.4 3.5 3.2 2.9 3.0 2.7 2.6 Education 3.0 2.8 3.0 3.1 2.8 2.9 3.0 3.2 57.2 57.8 57.4 58.3 59.0 60.9 61.0 61.5 Total services Source: Guangzhou statistical yearbooks (2005-‐2012) Table 3.7 | Shenzhen’s services sectors as percentage of GDP (2005-‐2011) Percent 2005 2006 2007 2008 2009 2010 2011 4.4 4.4 4.4 4.1 3.8 4.0 3.8 10.4 9.8 9.6 9.6 10.4 10.8 10.9 Financial services 6.3 8.1 11.5 13.0 13.5 13.6 13.6 Real estate 9.8 9.7 9.7 8.7 7.5 6.6 7.8 Leasing & business services 2.8 2.8 2.7 -‐ -‐ -‐ -‐ Public management & social organization 2.0 1.9 2.0 -‐ -‐ -‐ -‐ Education 1.3 1.2 1.1 -‐ -‐ -‐ -‐ 46.4 47.2 49.7 50.3 53.3 52.7 53.5 Transport, storage & postal Wholesale & retail trade Total services Source: Shenzhen statistical yearbooks (2006-‐2012) The services sector now accounts for more than 60 percent of Guangzhou’s GDP, having grown consistently and strongly. In 1978, it contributed half as much value as secondary industry. By 1989, it had become the dominant sector and by 2012, it was delivering about two-‐thirds of GDP. The economies of Foshan and Guangzhou are complementary, due in large part to their proximity. They typically serve different segments of the same local market. As Henderson has described: “In the early stages of industrialization, the largest cities in a country are the focal points for development and importation of technology, and are the initial centers of industrialization. However, as development proceeds, technologies used in manufacturing C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 43 production standardize, which permits decentralization of industrial production to small and medium-‐sized cities with lower labour and land costs, a process akin to the ‘product cycle’. For example, in Korea, Pusan and Taegu fell from 44 to 28%, while the share in small hinterland cities and rural areas rose from 25% to 42%” (Henderson, 2007). The development of Guangzhou and Shenzhen has followed a path first identified by Simon Kuznets (1957), whereby industry’s contribution to GDP first rises and then falls as services begin contributing a greater share. By contrast, in neighboring Foshan, industry’s share has continued to rise, from 50 percent to 60 percent. At the national level, services overtook the secondary sector in 2011 and within two years was delivering 46 percent of the country’s GDP – still low compared with developed economies. The role of FDI in Foshan’s economy Foreign direct investment (FDI) accounted for 30 percent of Foshan’s tax revenue in 2011 (see Figure 3.13) although new investment has declined in importance. The ratio of utilized FDI to Foshan’s GDP fell from 13 percent in 1997 to about 7 percent over 1999-‐2004 and has been 2-‐3 percent since then (see Figure 3.11). Hong Kong, Macau and Taiwan (HMT) have provided most of Foshan’s FDI. This highlights the importance of geography in economic development. Foshan benefited hugely from its connections with and proximity to these Chinese market economies, especially in the early period of its development. (Although most of the FDI probably came from Hong Kong, the available data does not provide breakdowns.) FDI’s decline in terms of profit contribution probably reflects the increasing competitiveness of local firms. In all, these observations about Foshan’s FDI suggest a dynamic local economy comprising local businesses that have learned and improved quickly during the reform period. The importance of foreign-‐invested enterprises has declined over the past decade, as represented by their contribution to gross industrial output. HMT-‐
sourced FDI declined from 33 percent in 2000 to 19 percent in 2011. However, FDI from outside Greater China rose over that time from 11 percent to 15 percent (see Figure 3.12). The overall decline was offset by the domestic private sector, which increased from 15 to 25 percent. A similar trend is reflected in tax data (Figure 3.13). The share paid by HMT enterprises almost halved between 2001 and 2003, from 30 to about 15 percent, remaining at that level until 2012. Meanwhile, the share of non-‐HMT foreign-‐
invested enterprises rose from 10 to 15 percent, while the domestic private sector’s tax contribution increased from 12 to 17 percent. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 44 Percent Figure 3.11 | Ratio of utilized FDI to GDP in Foshan (1996-‐2013) 16 14 12 10 8 6 4 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2 Source: CEIC; FGI analysis percent Figure 3.12 | Foshan industrial-‐output share by enterprise (2000-‐2011) 40 35 30 25 20 15 10 HMT Invested Foreign Invested 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 5 Private Sector Source: Foshan statistical yearbooks (2002-‐2012); FGI analysis C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 45 percent Figure 3.13 | Foshan tax contribution by enterprise (2001-‐2011) 35 30 25 20 15 10 HMT Invested Foreign Invested 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 5 Private Sector Source: Foshan statistical yearbooks (2002-‐2012) percent Figure 3.14 | Foshan profit contribution by enterprise (2001-‐2011) 35 30 25 20 15 10 HMT Invested Foreign Invested 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 2001 5 Private Sector Source: Foshan statistical yearbooks (2002-‐2012) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 46 percent Figure 3.15 | Enterprise profits as share of Foshan GDP (2001-‐2011) 5 4 3 2 HMT-‐Invested Foreign Invested 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 2001 1 Private Sector Source: Foshan statistical yearbooks (2002-‐2012) Despite this, foreign-‐invested enterprises have become more profitable during the past decade (see Figure 3.14) although less so than domestic firms. As a share of Foshan’s GDP, profits for HMT enterprises rose from about 1.0 percent in 2001 to about 3.5 percent in 2011 (see Figure 3.15). Similarly, profits for non-‐
HMT foreign enterprises increased from 0.6 percent to about 2.5 percent, while those for domestic private enterprises rose from 0.4 to 4.0 percent over the same period. Strong private and local economy The private sector overwhelmingly drives Foshan’s economy. In 2011, it accounted for 95 percent of Foshan’s total industrial production, from 81 percent in 2000 (see Table 3.8). This dominance by local firms is not common in many of China’s major cities. These characteristics of Foshan’s economy reflect its strong growth, as well as the diversity of growth models that exist across the country. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 47 Table 3.8 | Structure of Foshan’s industrial output (above scale) by enterprise Percent 2000 2006 2011 HMT-‐invested 33.2 24.9 19.0 Foreign-‐invested 11.1 13.0 15.0 Private 15.3 24.0 25.1 Jointly run 1.1 0.1 0.2 Limited liability 5.4 20.7 23.3 Joint-‐stock companies 15.2 10.5 12.4 Total 81.2 93.2 94.9 Source: Foshan statistical yearbooks (2002, 2007, 2012); FGI analysis C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 48 4 F I N A L G O O D S A N D S E R V I C E S While the evolution of modern capitalism in China began in agriculture, it was in industrial production where China engaged the international economy. The subsequent explosion of economic activity saw China grow from economic obscurity to the largest global economy (measured by purchasing power parity) in just 35 years. Establishing institutions in areas such as property rights, corporations and markets was crucial to this process. These often emerged from local policy innovations intended to solve ad hoc grassroots issues. They ignited the economic dynamism and energized an innovative and competitive people transforming China from a planned economy of centrally directed factory workers and peasants into today’s complex and diverse economic kaleidoscope. The most important institutional reform involved acceptance of the corporation. The modern concept of the firm dates to the United Kingdom’s Companies Act of 1862 (Micklethwait & Wooldridge, 2003). However, such entrepreneurialism was not tolerated in China until the start of the reform era in 1978 and the gradual dismantling of the centrally planned economy under which the state acted almost as a single nation-‐wide corporation. The Company Act introduced by the Central Committee in 1984 formally permited the establishment of private firms. In reality, private enterprises had existed for at least 16 years before that. This is typical of the country’s reform processwhereby practice often begets formal laws. Once the central authorities discovered that some regions had begun successfully operating markets, they then set about dealing with the many resulting challenges via the normal process of centrally directed local reforms. The result was a dynamic system of experimentation, alternately constrained and encouraged by opposing forces of central caution and local competition. Foshan’s geographic distance from Beijing and proximity to Hong Kong has been a key factor in it’s successful marketization and calls to mind the old Chinese idiom, “the mountains are high and the emperor is far away” (shān gāo, huángdì yuăn 山高皇帝远) As one of the country’s most dynamic and experimental localities, Foshan has been in the vanguard of marketization and industrialization. This has been especially so in the secondary industry – the key avenue by which China has captured a massive share of global markets and supply chains. Marketization put China on the same path as other rapidly industrialized ‘catch-‐
up economies’ (Japan, Taiwan, Singapore, Korea). Comparative advantage ensured that first light and then heavy industry benefited from China’s vast pool of low-‐skilled but low-‐cost workers. The sudden institutional changes following the central government’s approval of market reforms resulted in rapid industrialization. Local officials, incentivized by the Tiaotiao-‐Kuaikuai (central-‐
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 49 local) framework used whatever tools were available to support rapid growth. However, the pace of growth was such that institutional reform often lagged far behind. One consequence was the city’s expsion into a series of specialized industrial clusters with no central business district (see Map 4.1). The Foshan Story is, in essence, a history of how the city’s entrepreneurs, supported by ambitious local officials have driven rapid and massive industrial development. Along the way, they demonstrated the efficiacy of private enterprise and pioneered significant institutional reform. Why then did Foshan develop the way it did?” Much of the answer can be found by examining the city’s economic fundamentals and the nation’s governance structure. In short, Foshan was relatively successful in competing against other city governments (kuai versus kuai), and stretching the rules of the game to its advantage. However, local officials can rarely stray too far from central-‐government thinking, even if they are allowed a large measure of latitude20. Thus, the Foshan Story is also an exemplar of the significant positive impact that can result from changes to central policy. Understanding China’s policy-‐reform processes is crucial if we are to correctly interpret current economic and political events. 4.1
FOSHAN’S INDUSTRIAL-‐OUTPUT G ROWTH Our economic overview of Foshan in Chapter 3 highlighted that almost two thirds of its output comes from industry. For that reason, this chapter devotes most attention to the secondary sector, although we discuss services toward the end. Along with Guangzhou and Shenzhen, Foshan vastly outperformed most Chinese cities in terms of gross industrial output between 1996 and 2010 (see Figure 4.1). By 1996, it already produced four times more than the average city, rising to six times after a further 14 years during which industrial-‐output averaged 24 percent annual growth. By that time, it had even overtaken Guangzhou, having avoided a major downturn during the global financial crisis. By responding to global demand, Foshan’s industries generated local demand for production factors21 such as intermediate goods, land, public services and infrastructure, finance, and labor. We noted this symbiotic relationship in discussing the nature of markets in Chapter 2 and it emerges here as critical to Foshan’s growth. 20 A telling example of local officials establishing policy at odds with national law is the informal market for communially owned land addressed in Chapter 5. 21 This is known in economics as derived demand. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 50 Billion RMB Figure 4.1 | Gross industrial output: Foshan, Guangzhou, Shenzhen and China average (1996-‐2010) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1997 0 1996 200 Foshan Guangzhou Shenzhen Prefecture Level City-‐Avearage Source: Guangdong statistical yearbook (1997-‐2011) 4.2
FOSHAN’S R EFORM-‐DRIVEN G ROWTH How did so many people in Foshan suddenly become so much more productive? The initial critical change occurred when Deng Xiaoping succeeded Mao Zedong following the latter’s death and instituted a more pragmatic, less ideological approach to economic development. Allowing the establishment of private enterprise was crucial to this. Corporations are a remarkably efficient social structure for organizing productive effort. The resulting explosion of private firms had access to global markets, capital, technology, and management experience (especially via Hong Kong and to a lesser extent, Taiwan). Initially, not all Chinese firms were permitted to engage global markets. Instead, certain areas were granted special status. This reflects China’s cautious reform-‐
driven growth model: experimentation and evaluation (shì yī shì, kān yī kān 试一
试，看一看) within the constraints of tiao-‐kuai dynamics. This institutionalized reform process is responsible for both China’s remarkable development and also its seeming internal contradictions and inequalities. Deng became paramount leader at a time when there was a recognized need for urgent change. Part of the response was to loosen the reins on local governments, especially in the south where people were both more aware of C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 51 market practices and far enough from Beijing that the political risks of such a strategy were lower. At Deng’s instigation, the State Council in 1979 to designated Guangdong and Fujian provinces as testing grounds for experimentation with market-‐oriented and internationally open reforms. This is the pillar of the famous “reform and opening” (găigé kāifàng 改革开放). As a city in Guangdong Province, this gave Foshan substantial autonomy over how to achieve the central government’s objective of higher economic growth. In terms of the conceptual model described in Chapter 2, two changes had occurred. First, the strategic guidance for southern provinces was altered. Second, China’s development cycle entered a phase of increasing local autonomy. The trend towards a market economy has continued building momentum with only moderate setbacks. In 1997, then-‐President Jiang Zemin claimed in his official work report to the 15th National Congress of the CCP that “the non-‐public sector is an important component… of our socialist market economy” (Jiang, 1997). This was a milestone in official thinking towards private enterprise. Two years later, the Constitution was amended to acknowledge the private sector’s importance (Chu & Song, 2014). “Reform and opening” gave clear incentives to Foshan’s officials. The Party’s control of bureaucratic promotion through the Organization Department (see Chapter 2) ties career success to achieving Party objectives. Officials also face pressure from below to improve local prosperity. Thus the incentives for Foshan’s officials were suddenly realigned with local economic growth. They responded by actively facilitating the creation of markets and supporting local firms. Foshan has limited natural resources and historically lacked the major SOEs that diligently protect their administrative monopolies against the tide of market-‐
oriented reform. Absent those crutches, and inspired by the positive example of nearby Hong Kong, officials turned to markets to promote growth and generate revenue. In Chapter 3, section 3.3, we examined Foshan’s administrative divisions. It is a municipal level city comprised of five relatively autonomous and competitive districts. All levels of the city’s government (municipal, district, and township) began creating spaces to operate private enterprises, while incentivizing and supporting their growth. Township and Village Enterprises (TVEs) Early in the reform period, Foshan’s then-‐counties encouraged the development of TVEs, especially Shunde and Nanhai – historically the city’s most urban and industrialized areas. TVEs were successful throughout the coastal provinces in the early 1980s, notably Guangzhou and Fujian, as well as the likes of Zhejiang, north of Shanghai, and Jiangsu, to its south (Perotti, Sun, & Zou, 1998). C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 52 TVEs were attractive to local governments for several reasons. Many delivered relatively strong growth, which local authorities had an incentive to encourage because of competition for development. However, TVEs also provided revenue. Most SOEs are owned by provincial or central governments, meaning their revenues bypass local officials. By contrast, many TVEs, were owned and run by village heads or county party members, so a significant share of their profit was retained by the local governments and communities. Transforming a planned economy into a market-‐oriented one is no simple task. The cities and districts of Guangdong and Fujian began competing to attract foreign investors who could, in effect import centuries of industrialization and market experience. Foshan borrowed an FDI model known as compensated trading that had proved successful in rapid-‐catchup economies such as Japan, Korea, and Taiwan. Compensated trading is the most basic form of FDI. It entails a foreign enterprise establishing almost the entire supply chain, relying on locals only for land, labor and some facilities. The model particularly suits labor-‐intensive manufacturing and is common in textiles. The Chinese term for it roughly translates as “bring three, provide one” (sān lái yī bŭ 三來一補). The Dajin garment factory, a TVE in Foshan, was the first such “three-‐plus-‐one” compensated-‐trading enterprise in China. Established in 1978 by a Hong Kong industrialist, by 1994 the TVE had achieved total sales of RMB220 million, with operations in New Zealand and the U.S.22 Its success meant the business model was quickly adapted throughout the Pearl River Delta and played a key role in the region’s early industrialization. Dajin’s foreign investors provided the equipment and design. The operation created opportunities for local workers to learn “on the job” and for local entrepeneurs to learn by imitating. Through overseas partnerships, Foshan companies and workers began developing business and management expertise, as well as acquiring the technology necessary for subsequent independent growth. To compete against other cities for foreign investment, Foshan offered incentives such commissions for agents who attracted FDI, cheap industrial land and tax breaks. However, because such incentives can be easily adopted by others, the initial advantages they bring tend not to last. By contrast, institutional reform is more difficult, so a city with strong governance and well-‐
functioning market institutions can achieve a more sustainable competitive edge. By 2013, Foshan had attracted a total of USD18.8 billion of investment from foreign enterprises. Between 1978-‐1992 more than 210,000 sets of 22
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C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 53 advanced equipment and 700 productions lines were imported, greatly improving both the efficiency and quality of the city’s enterprises. Many multi-‐
nationals that were attracted to Foshan, such as Panasonic, Esquel, Toyota and Volkswagen, have been instrumental in establishing industry supply chains and clusters. Demand for property-‐rights infrastructure China’s incremental improvements in developing property-‐rights have been mostly demand driven. Property rights are a key requirement of private enterprises, and foreign investors typically agitate loudly for improvements in this area. Local firms protective of their assets, banks demanding collateral, governments wanting to measure tax obligations, and foreign investors seeking standards similar to those in their home countries have all helped drive China’s property-‐rights reforms. Again at the 15th National Congress of the CCP, Jiang argued that it was “necessary to improve the legal system concerning property and protect the legitimate rights and interests of and fair competition among all types of enterprises” (Jiang, 1997). Foshan had already made headway in this regard. It began clarifying enterprises’ property rights in the early 1980s. Ownership reform for SOEs and collective enterprises was an important element of this effort. Here, too, Foshan moved ahead of the central government. 4.3
IMPACT O N FACTOR M ARKETS Basic microeconomic theory explains how greater demand for final products results in greater demand for the factors that produce them (Mas-‐Colell, Whinston, & Green, 1995). Here we consider four critical and mutually interdependent factors: infrastructure, land, finance and labor. Land: This is the most important factor over which local governments have substantial control. Offering low-‐cost land to firms that promised to develop in a preferred way has been a favored tool of local governments since the start of the reform era. Land-‐related reforms and institutional evolution in China and Foshan, as well as the city’s land market, are discussed in Chapter 5. One way to understand local governments is by analogy with feudal-‐era land lords. Local authorities control land and assign use according to their priorities. Responding to their own incentives, they can use their control of distribution to shape incentives for investors to support industrial production within their jurisdictions (see Chapter 5). Labor: Growth in the production of final goods naturally leads to higher demand for labor, although its nature changes over time. As firms become more C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 54 productive and capital-‐rich, they require increasingly skilled and knowledgeable workers (see Chapter 6). Infrastructure: As business activity in Foshan expanded, demand for transport, power, water, communications and other forms of infrastructure increased. Infrastructure is a critical determinant of transaction costs in any market. It is also a factor over which local governments have substantial control. Provision of advanced infrastructure is, therefore, one way in which China’s cities compete to attract business. Infrastructure-‐related reforms and institutional evolution in China and Foshan are discussed in Chapter 7. Finance: Rhe increase in demand for capital as business activity expands is straightforward. The larger the private sector, the more borrowing occurs. Similarly, the greater a society’s wealth the more capital is available in search of productive investments. However finance in China is not a factor over which local authorities have much influence. It is largely an element of central-‐
government policy (see Chapter 8). 4.4
INDUSTRIAL CLUSTERS A ND ‘SPECIALIZED T OWNS’ Foshan is a city with certain peculiarities. These include a reputation as a traditional center of martial arts and porcelain. More recently, it has become known for its large number of industrial clusters, or ‘specialized towns’ (zhuān yè zhèn 专业鎮). These clusters form a patchwork city of industries with no central business district (although a central cultural and retail district has recently been constructed). Industrial specialization by district or township is rarely as pronounced as in Foshan. Shunde for example, is best known for household appliances. Within that district, Daliang is a center for plastics, Chencun for flowers and horticultural products, and Lecong for furniture. A little to the north-‐west, in Chancheng district, Shiwan is famous for its ceramics. Some of Foshan’s many key production clusters are marked on Map 4.1. Nanfang Wang (2011) estimates that 82 percent of Foshan’s local GDP derives from specialized towns – far higher than for most cities in Guangdong (see Figure 4.2). C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 55 Map 4.1 | Major production clusters in Foshan Source: Foshan National Torch Innovation Pioneering Park; FGI C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 56 Figure 4.2 | ‘Specialized towns' share of Guangdong cities’ GDP (2009) Foshan Jieyang Chaozhou Yunfu Jiangmen Shantou Zhongshan Meizhou Dongguan Shanwei Heyuan Qingyuan Huizhou Maoming Zhaoqing Yangjiang Zhanjiang Zhuhai Shaoguan Guangzhou 0 20 40 60 80 100 Percent Source: Nanfang Wang (2011) Foshan’s distinctive urban structure is almost entirely due to institutional reforms during the early stages of China’s transition. Its early corporatization and industrialization triggered an explosion of upstream demand for factors of production. This created opportunities for entire supply chains to develop, due to the interdependence of markets, as depicted in Figure 2.1. However, this occurred at a time when China’s economy was still dominated by communes (and subsequently, TVEs) and collectively-‐owned land. Market institutions were still in their infancy. Communes acted almost as a individual firms. Each aimed to develop industry, spurred by political campaigns. Profits were shared according to job title and rank. Communes competed against each other, with most pursuing some for of specialization to gain an edge. However, such specialization was limited and it was not unusual for a commune to build and entire local supply chain, for example. Without tradable land-‐rights, communes and TVEs were tied to their allocated plots of land. Not only were enterprises barred from relocating to the city-‐
periphery, as normally occurs during urban development, the absence of a market for land meant there would have been no incentive to do so anyway. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 57 Thus, supply chains typically grew in clusters wherever the enterprise they serviced had initially been established. This unusual urban structure is especially marked in Foshan (and, to a lesser extent, other Pearl River Delta cities and even Fujian and Zhejiang) because it was one of the very first to begin industrializing in the earliest stages of China’s market transition. As well, this structure was very effective in lowering transaction costs during the transition because producers from almost every step of the supply chain were located near each other. This enabled them to achieve efficiencies in specialization and sourcing as well as generate sufficient scale to attract global buyers and sellers. Thus Foshan forded strong links with global markets, especially via established trading networks centered on Hong Kong. Foshan became, in effect, a one-‐stop shop where major buyers could view finished products and work directly with sellers and producers at almost every stage of the supply chain. Since Foshan’s specialized markets were so successful in generating the rapid growth prized by Beijing, competing local authorities did everything they could to support them. In 1983, Foshan officials began constructing large-‐scale industry-‐specific markets in select towns. In the following years, the city began raising and allocating funds to accelerate construction of these specialized market towns. A key revenue source was fines and fees collected by the Administrative Bureau of Industry and Commerce (ABIC). From 1982 to 1997, the city’s ABIC invested RMB87 million for such construction, building 2.7 million square meters of market space. In 1994, construction was opened to the private sector, which responded enthusiastically. Between 2000 and 2002, construction of market space increased by 16 million square meters. County and township governments also began funding the development of specialized markets and provided cheap or even free land (NDRC, 2013). Lecong offers an example. The then-‐county government of Shunde, in which Lecong is located, supported the establishment of a specialized furniture market in the 1980s. The superiority of foreign-‐invested manufacturers in terms of technology and capacity, spurred local companies and the authorities to lift their game. In this way, the establishment of furniture markets helped locals compete with foreign enterprises. By 2002, there were 566 foruniture-‐focused markets, including 504 for consumpter goods, 59 for production materials and one each for logistics, real-‐
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 58 estate agencies and vehicle retailers23. By 2014, Lecong advertized itself as “the world’s largest furniture market”, hosting about 3,500 companies with showrooms covering three million square meters (Excel Guangzhou, 2014). Such industrial clusters were powerful drivers of economic expansion, particularly during the export-‐oriented stage of development. However they are no longer necessarily best placed to meet new challenges. It is unclear how firms that depend on supply chain proximity will adapt to internet commerce and massive reductions in transport and communications costs. Added to that, urbanization and industrialization are no longer the overwhelming priorities of Foshan’s officials. Recently they have begun implementing city-‐wide zoning to combat pollution from small factories and are developing ‘new city’ centers to attract advanced technology and knowledge-‐based activities in a bid to lift industry up the value chain. Just as Foshan encouraged the development of specialized towns in response to central-‐government incentives and policies, it is now re-‐aligning its development strategy to match new incentives and policies. 4.4.1
Case study: Foshan Ceramic Group Local SOEs have also played a significant role in developing Foshan’s sophisticated supply chain networks. The Foshan Ceramic Group (FCG) is an exemplar, having helped create an industrial cluster for ceramics producing that encompasses its hometown of Shiwan and the neighboring town of Nanzhuang. Before China’s “reform and opening”, the only ceramics producers were SOEs, which made consumer goods in strict accordance with central-‐government guidlines. In the summer of 1978, a Hong Kong businessman arrived in Foshan seeking an Italian-‐style tile for which there was substantial demand in Hong Kong. The then-‐Foshan Ceramic responded by experimenting for three months to match the tile and then dramatically increased production to the point where it was selling 400,000 pieces. However these sales generated little profit because the production process was too time-‐ and energy-‐intensive, and suffered from quality issues. In 1980 under new leadership, FCG moved away from its traditional products to focus on ceramics for construction. With the help of foreign manufacturers, it introduced an Italian production line that delivered the same output with only 12 percent of the labor, 25 percent of the land, 34 percent of the energy, and in less than 4 percent of the time. This meant FCG could make higher quality products and sell them at much lower prices (40-‐47 percent cheaper by 1984). 23 Foshan Local Records 1997-‐2002. Volume 2. Page 284. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 59 Between 1982 and 1991, FCG introduced 21 automated production lines, significantly enhancing production capacity. It also began making its own production equipment. FCG’s success attracted other enterprises to the industry – all the more so because its comparatively cheap equipment lowered entry barriers for smaller firms. As a result, ceramic TVEs in Shiwan and Nanzhuang grew rapidly during the 1990s. Taking the lead of SOEs such as FCG, township governments began encouraging entrepreneurs to establish their own factories and production lines. This guaranteed demand for associated businesses such as components, equipment, material and logistics. TVEs were early responders to this new demand. This combination of ceramics producers and supporting businesses formed a robust ceramic cluster and supply chain. Further, the strength of those SOEs supported the emergence of more ceramics companies and related businesses and provided a talent pool for growing TVEs. The founders of these new enterprises were typically former SOE employees. Unconstrained by government-‐set wages, they were able to lure SOE-‐trained technicians and engineers. As more SOE workers realized the profit opportunities, they also started to set up their own businesses. The scale of FCG’s operations enabled it to set up its own vocational schools. These have trained thousands of workers, giving them the skills to get jobs in the rapidly industrializing ceramics-‐manufacturing sector. A victim of its own success, FCG began to fall behind the private-‐sector firms it had helped foster (see section 4.6.2 for the subsequent development of Foshan’s ceramic industry). 4.5
OWNERSHIP R EFORM: PRIVATIZATION O F SOES Before the reform era, China did not have “firms” in the Western sense. Instead, it had work units, with all production essentially part of a single state enterprise. SOEs were initially part of the bureaucracy. Enterprises are intrinsic to the market system and can be powerful tools for production. By getting their hands on such tools, local authorities could significantly increase the productivity and wealth of their people. Ownership reform progressed in two stages. During 1978-‐1993, work units were turned into formal enterprises – that is, independent legal entities with rights and responsibilities. The concept of a “legal person” was first enacted in China in the General Principles of Civil Law (1986) and the SOE Enterprise Law (1988). C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 60 Next, starting in 1993, came a transition to “a modern corporate system governed by the Company Law” (Xiao G. , 1998). The dynamics of tiáo-‐kuài relations are clear in this process. Deng encouraged local governments to experiment with găizhì24 during his 1992 southern tour. At that time, there were no plans for SOE reform and Beijing had made few official comments on ownership reform, leaving the process to local authorities. It was not until 1995, that it announced the policy of “grasping the large and letting go of the small” (zhuā dà fang xiăo 抓大放小), which privatized small and medium SOEs while protecting larger ones. The policy was the result of central-‐government observations of local experiments, especially in Guangdong and Fujian, and “marked the beginning of active support by the central government for găizhì” (Garnaut, Song, Tenev, & Yao, 2005, p. 31). Beijing was concerned by the unprofitability of many SOEs and the attendant financial risk from triangular debt involving national banks. Lack of competition was identified as a key impediment to profitability, and the ownership structure was considered a major impediment to competition. 4.5.1
Foshan’s implementation of ownership reform Getting ownership right was extremely important. Successful ownership reform established some of China’s most profitable and productive companies, such as Midea, an electrical appliance manufacturer based in Shunde that now employs 135,000 people. But failed reform created companies that were forced to lay off workers and write off assets. The critical period in Foshan was 1994 to 1997, when Zhu Rongji and Jiang Zemin clearly signaled support for privatization with the “grasping the large and letting go of the small” policy. In Guangdong, there were relatively few large SEOs, so găizhì progressed rapidly. In 1992, the Guangdong provincial government chose the then independent county of Shunde as a testing ground for comprehensive reform, with a focus on ownership reform. Shunde was chosen partly because it had a relatively large number of collectives and SOEs. Below, we consider ownership reform in Foshan by looking at two contrasting examples. Midea shows how to get it right, the result being one of China’s most successful domestic firms. Kelon shows what happens when reform is done badly. 24 Găizhì (改制) refers to the transformation of SOEs into market-‐competing entities. Western concepts of privatization are neither necessary nor sufficient to capture the full meaning of găizhì. See Wen (2005) for a full explanation. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 61 Case study: Midea Founded in 1968 as a workshop for producing bottle caps, Midea is now a multinational home-‐appliance manufacturer and one of China’s most successful private firms. In 2012, it had 135,000 employees, RMB68 billion revenue and turned a profit of RMB3.5 billion (Midea, 2012). The Shunde reforms of 1992 encompassed many areas, including ownership and management of collectives. Midea’s management took the opportunity to restructure into a private enterprise, GD Midea Holding Co, Ltd. The Beijiao Township Economic Development Company (BTEDC), representing the founders, received 70 percent of the shares, with the rest going to staff. In 1993, Midea listed on the Shenzhen Stock Exchange, making it the first township enterprise approved by the CSRC to list on any stock exchange. BTEDC was allotted 44 percent of shares with employees receiving 23 percent, the public 25 percent and the rest to other SOEs. The next year, BTEDC sold 11 percent of the stock to other SOEs and collectives by the local or provincial governments. In 1996, employee shares became publicly tradable. In April 1998, Midea Holding Co, Ltd (Midea Holding) was created to serve as an investor and manager of public capital belonging to the Beijiao township government. The firm received 30 percent of Midea’s total shares from BTEDC and other enterprise shareholders. This made the new company the largest shareholder, with BTEDC’s 8 percent leaving it the second-‐biggest. In 1999, the Shunde Kailian company was set up to manage the shares of Midea’s founders. It then bought out BTEDC’s shares, ending the township government’s ownership role. At the start of 2000, management and the company’s labor union formed an investment and management company named Meituo Investment Company (Meituo). During the year, Midea Holding transferred all of its Midea shares to Meituo and then took a controlling stake in it. In 2001, Midea’s management bought out the labor union’s stake in Meituo. In 2004, its name was changed to Midea Group. Since then, the ownership structure has continued to evolve. But these steps in ownership reform gave Midea the flexibility it needed to adapt and grow. In the process, it was transformed into a listed company controlled by its founder and senior management instead of the local government. This gave the people responsible for the firm’s success control over its direction and created performance incentives. Being a listed company also imposed more modern corporate governance on the company. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 62 Case study: Kelon In 2001, Harvard Business School presented a case study titled, “Kelon: China’s Corporate Dragon”, hailing the success of the refrigerator manufacturer (Huang & Lane, 2001), which was the first TVE to list on the Hong Kong Stock Exchange (HKSE). Today, Kelon is a subsidiary of Hisense Group. Kelon was created in 1984 as a collective enterprise by Rongqi township’s deputy chief of industry and transportation, Pan Ning. The town’s government provided capital and maintained ownership. From 1984 to 1992, the company grew so fast that it became the largest refrigerator-‐maker in China and was rewarded by a visit from Deng. In 1992, the year Midea began its restructuring, Pan decided to reorganize Kelon’s ownership structure. The township government received 80 percent of the shares and staff the rest – all at the nominal price of one yuan per share. In 1996, the company listed, with Kelon Group Co, Ltd (representing the township government) allotted 42 percent, employees 10 percent and the public the rest. Kelon’s success continued, thanks to Pan’s strong leadership combined with favorable economic conditions and strong government backing. However, like other SOEs, it began to encounter strong competition from growing private enterprises. In 1999, Pan Ning was forced to step aside as CEO due to the age limits for state officials. He was replaced by another official. The next year, Kelon shocked the markets by reporting its first sizable loss of RMB678 million. However, 2001 was far worse, with the company announcing a RMB1.5 billion loss. When government officials were unable to reverse the loss, they turned to further ownership reform. Negotiations began with Hong Kong-‐
listed Greencool, which operated in the same industry and whose owner, Gu Chujun, was known for his technological and management skills. As a result, Greencool agreed to buy 20 percent of Kelon for RMB560 million, although ultimately it paid only RMB348 million. This was widely criticized because the price seemed too low for a star collective company and the deal clearly benefitted certain individuals. Greencool was considered to be too small to prop up Kelon and its declining sales. Kelon reported a further loss of RMB3.7 billion in 2005, with net liabilities of RMB1.1 billion. It also found itself involved in 93 legal cases. Gu and nine other executives were arrested on suspicion of fraudulent investment and financial statements, as well as inappropriate use of proceeds. Gu was later sentenced to 12 years in prison. Kelon was taken over by the local government and eventually sold to Hisense, a large SOE from Qingdao (money.163.com, 2008). Kelon highlights the importance of clear property rights. Lack of transparency of ownership was among the company’s problems. Its early ownership reform was C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 63 insufficient as it left control in the hands of township officials. As well, it lacked any structure to align the interests of managers and shareholders. Of course, Kelon was not alone. Foshan was home to a multitude of new enterprises and failure is as much a part of the market economy as success. Jianlibao and Foshan Ceramic Group are just two other SOEs that failed to leverage their initial success into sustained growth. FCG, as we have seen, was unable to compete with the private-‐sector ceramic firms it helped foster. 4.6
INDUSTRIAL U PGRADING A ND SERVICES Nobel Prize winning economist Michael Spence reframes the so-‐called middle-‐
income trap as the middle-‐income transition. The transition is well known, but the specific mechanisms that make it problematic are less so. Spence explains it as “that part of the growth process that occurs when a country’s per capita income gets into the range of USD 5,000 to USD 10,000. At this point, the industries that drove the growth in the early period start to become globally uncompetitive due to rising wages”. (Spence, 2011, p. 100). The theoretical economic literature calls this “dynamic comparative advantage” (Krugman, 1987) and considers it a normal and inevitable part of growth. The idea that growth may be resisted does not enter basic economic models. The source of the problem for some countries seems to be the creation of vested interests powerful enough to hijack reforms in favor of their own rent-‐seeking. Middle-‐
income countries are apparently unusually susceptible to this problem, possibly because they combine significant wealth with relatively weak institutions, making them exceptionally vulnerable.25 China’s central leaders have exuberantly embraced the dynamics of comparative advantage and there is evidence that Foshan has responded with some success, facilitating the evolution of its industrial structure. A shift towards less labor-‐
intensive sectors occurred. Table 4.1 shows the 10 Foshan industries with the most dominant output in each five-‐year period from 1986 to 2011, with output per employee as a proxy for labor productivity. Foshan’s industrial growth proceeded through three stages of development and is now entering a fourth. The first was dominated by SOEs and saw early market-‐
oriented government policies. During the second, private enterprises became increasingly competitive and Foshan implemented ownership reform, advancing the private sector-‐orientation of the economy. The third stage saw local firms become successful, as more emerged alongside foreign enterprises. In the 25 In Chapter 2, we identified different ways markets and governments could fail and applied “middle-‐income trap” to simultaneous failure. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 64 current stage, production is directed increasingly towards China’s domestic market. Foshan faces the challenge of sustaining growth and rising up the value chain in services as well as industry. The city has had some success encouraging industrial upgrading, although the pace of transition may be slower than in some neighboring cities. Guangzhou stands out because it is the provincial capital. As a result, it is home to the regional headquarters of many large corporations that require high value-‐added business services. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 65 Table 4.1 | Top 10 industries in Foshan by output (1986-‐2011) (percent of Rank Industry Foshan’s total output) 1986 1 2 3 4 5 6 7 8 9 10 Electrical machinery & equipment Textiles Food manufacture Communications & other electronic equipment Plastic products Construction materials & other nonmetal mineral products Metal products Equipment Sewing Handicrafts 20 18 7 6 6 5 5 4 3 3 1991 1 2 3 4 5 6 7 8 9 10 Electrical machinery & equipment Textiles Plastic products Construction materials & other nonmetal mineral products Communications & other electronic equipment Metal products Beverages manufacture Equipment Food manufacture Smelting & pressing of nonferrous metals 19 13 8 7 6 6 4 4 4 3 1996 1 2 3 4 5 6 7 8 9 10 Electrical machinery & equipment Nonmetal mineral products Plastic products Metal products Textiles Communications & other electronic equipment Transport equipment Food processing Garments & other fibers Beverages manufacture 19 13 8 7 6 6 4 4 4 3 2001 1 2 3 4 5 6 Electrical machinery & equipment Nonmetal mineral products Communications, computers & other electronic equipment Metal products Plastic products Textiles 27 10 8 6 5 5 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 66 7 8 9 10 Smelting & pressing of nonferrous metals Textile garments, footwear & headgear Processing of farm & sideline food Raw chemical materials & products 4 4 3 3 2006 1 2 3 4 5 6 7 8 9 10 2011 Electrical machinery & equipment Nonmetal mineral products Smelting & pressing of nonferrous metals Metal products Plastic products Communications, computers & other electronic equipment Raw chemical materials & products Textiles Instruments, meters & machinery for cultural & office use Textile garments, footwear & headgear 23 9 8 8 6 5 4 3 3 3 1 Electrical machinery & equipment 2 Metal products 3 Nonmetal mineral products 4 Smelting & pressing of nonferrous metals 5 Communications, computers & other electronic equipment 6 Plastic products 7 Textiles 8 Raw chemical materials & products 9 General-‐purpose machinery 10 Smelting & pressing of ferrous metals Source: Foshan statistical yearbooks 23 7 7 6 5 5 4 4 4 3 In Foshan, productivity (measured as value added per employee) in the 10 most productive industries improved dramatically from 2001 to 2011. That of the most efficient industry in 2011 reached almost RMB400,000 per employee, from just RMB12,000 in 2001. However, there was less improvement from its largest industry (“electrical machinery & equipment”). It rose from almost RMB110,000 per employee to almost RMB200,000 in 2010, but fell again to just over RMB150,000 in 2011. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 67 Table 4.2 | Labor productivity of Foshan’s most efficient industries (2001-‐
2011) (RMB10,000 Year Industry 2001 Food processing 12.17 2002 Food processing 12.14 2003 Communications equipment, computers & other electronic equipment 11.66 2004 Nonferrous metal smelting & rolling 14.87 2005 Chemical raw materials & products 18.07 2006 Chemical raw materials & products 22.42 2007 Nonferrous metal smelting & rolling 27.28 2008 Nonferrous metal smelting & rolling 27.87 2009 Nonferrous metal smelting & rolling 34.02 2010 Ferrous metal smelting & rolling 43.54 2011 Chemical raw materials & products 39.13 per employee) Source: Foshan statistical yearbooks (2002-‐2012); FGI calculation Although Foshan’s total industrial output was similar to that of Guangzhou, labor productivity of the 10 most productive industries in 2011 was much lower in Foshan, averaging RMB250,000 per employee compared with Guangzhou’s RMB500,000. This may be due in part to high capital investment by the government. For instance, Guangzhou’s industry with the highest value-‐added (“transport equipment”) contributed RMB585,000 per employee – more than any Foshan industry. “Production & supply of electric and heat power” added RMB854,000 and “petroleum-‐refining, cooking & nuclear-‐fuel processing” added almost RMB1.5 million for every person employed in the sector in 2011. That is almost four times more than for Foshan’s most efficient industry. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 68 Table 4.3 | Labor productivity of Foshan’s top 10 industries (2011) (RMB10,000 per employee) Electrical machinery & equipment 15.3 Metal products 18.5 Nonmetallic mineral products 22.1 Nonferrous metal-‐smelting & rolling 31.1 Communications equipment, computers & other electronic equipment Plastic products 19.7 Textiles 19.3 Chemical raw materials & products 39.1 General equipment 23.3 Ferrous metal smelting & rolling 34.9 27.0 Source: Foshan Statistical Yearbook (2012); FGI calculation Table 4.4 | Labor productivity of Guangzhou’s top 10 industries (2011) (RMB10,000 per employee) Transport equipment 58.5 Communications, computers & other electronic equipment 14.8 Raw chemical materials & products 77.3 Production and supply of electric & heat power 85.4 Electrical machinery & equipment 13.7 Petroleum-‐refining, cooking & nuclear-‐fuel processing 147.1 Smelting & pressing of ferrous metals 50.6 Textile garments, footwear & headgear 9.0 General-‐purpose machinery 20.1 Food manufacturing 26.8 Source: Guangzhou Statistical Yearbook (2012); FGI calculation C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 69 Table 4.5 | Labor productivity of Foshan’s “electrical machinery & equipment” industry (2001-‐2011) (RMB10,000 Year per employee) 2001 10.8 2002 11.3 2003 10.5 2004 9.3 2005 11.8 2006 13.9 2007 16.5 2008 17.7 2009 19.2 2010 19.7 2011 15.3 Source: Foshan statistical yearbooks (2002-‐2012); FGI calculation Foshan does not have the productivity performance of Guangzhou, largely due to its lower capital investment. (Guangzhou has a more sophisticated industrial structure.) However, it has been improving steadily. More importantly, with respect to the middle-‐income transition, sectors that improved the most are not the largest but those that are relatively capital-‐intensive. This generates a shift in Foshan’s output structure away from labor-‐intensive activity, lifting the city up the industrial value chain. This is a result economists might normally expect based on models of dynamic-‐
comparative advantage. However, this is not always guaranteed. It has been shown by the many countries that failed to continue growing through middle-‐
income into high-‐income ranges. It has been facilitated in part by a strong commitment by Beijing to successfully navigating middle-‐income transition. Central authorities used tiaotiao to pressure local authorities (kuaikuai). In particular, they employed promotion and discipline mechanisms, central government ministries and national plans. In Foshan’s case, local authorities responded creatively, adjusting the market incentives for private enterprise with some success. 4.6.1
Case study: Keda Founded in 1992 by an ex-‐SOE engineer to supply cheap ceramic-‐production equipment, Keda provides a case study of a large Foshan-‐based firm rising up the industrial-‐services chain. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 70 With a client base of ceramic producers on its doorstep, the company grew quickly. Beginning in the 2000s, Keda began investing in R&D, reorienting from the adoption and reproduction of existing technology towards internal innovation. In 2002, the company listed public on the Shanghai Stock Exchange, providing it with additional capital to allocate in research. By 2005, with its own R&D department, Keda was a national leader in its field, dominating the domestic market and developing substantial exports. By 2012, revenue reached RMB2.66 billion, it had the lion’s share of the domestic market and was exporting to more than 300 foreign customers in 45 countries. Keda has continued to invest in innovation, owning 602 patents and 747 patent applications. It also leads, or participates in, national standards-‐setting bodies. In 2007, Keda was recognized as the most creative new high-‐tech enterprise in China. In 2012, it applied for patents for 28 new inventions, 93 practical innovations and three designs. Much of its success is due to the firm’s focus on human capital. Some 25 percent of Keda’s employees are technicians, 16 percent hold master’s degrees and 26 percent were educated in two-‐year colleges. Compared with other manufacturers, its human-‐resources structure is highly oriented towards a well-‐educated, well-‐trained young workforce. This allowed Keda to quickly respond to local-‐government measures on pollution in the ceramics industry. While many other ceramics companies relocated production, Keda turned to energy-‐efficient and environmentally friendly equipment. It now produces the most advanced complete production-‐
line equipment for ceramic producers, with the lowest emissions and energy consumption. While working to make its existing products more sustainable and efficient, Keda also took the opportunity to move into new markets such as clean coal gasification. Such evolutions of technology are essential for an industrialized city like Foshan, especially where resource and environmental constrains have already hindered economic growth. Keda’s success highlights that there are attainable solutions for businesses when faced with such obstacles as environmentally damaging practices. However, it was not until the local government began taking a wider view of growth and emphasizing environmental protection that Keda adjusted its processes to adopt those solutions. Keda mainly manufactured machines for local ceramic producers that consumed large amounts of coal, generating pollution and resulting in low energy efficiency. Responding to central and local governments’ stricter environment and energy regulations, Keda moved early to develop more efficient and less polluting production processes. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 71 This change continues, with ongoing development of eco-‐friendly equipment and clean-‐energy projects where the firm sees strong potential profit opportunities. Keda is an exemplar of a firm successfully responding to changes in the institutional and regulatory environment. This has enabled it to become one of China’s leading industrial companies. Among those institutional changes are property rights, more recently including a strong effort to regulate intellectual property. In the early stages of development, Keda and other Chinese firms relied almost entirely on innovations from elsewhere. As it developed through innovation, it put pressure on the government to regulate intellectual property, registering a large number of patents that now provide a substantial portion of its asset base and profits. 4.6.2
Case study: Transformation of Foshan’s ceramics industry due to pollution concerns The ceramics industry evolved to be one of Foshan’s pillars of industry. However, its tremendous growth and success came at a cost. Production is highly polluting and energy-‐intensive. The city’s two ceramics centers, Shiwan and Nanzhuang town, have both pushed their ecosystems to the limit, to visible effect. Air quality and water contamination are serious problems. The local authorities responded in 2003 by focusing on industrial transformation and upgrading. They introduced policies to incentivize a move to higher end, less damaging manufacturing. However, in these added to already rising operating costs. As a result, local enterprises began relocating. By 2013, fewer than 60 of the 600 ceramics companies remained. Furthermore, their entire supply chains began moving as well. Foshan’s status as a ceramics center declined. Fewer customers came and fewer enterprises participated in the city’s ceramics exhibition.
In response, the city government adopted a “headquarters economy” strategy in 2007 to encourage firms to keep high value-‐added parts of the supply chain in Foshan while relocating only environmentally costly production. While the shift towards a more service-‐oriented economy creates potentially more sustainable and less damaging growth, it remains to be seen if this strategy will work.
One key to the Foshan ceramics industry’s competitiveness was its mature supply chain, which took more than 35 years to build. If the “headquarters economy” strategy fails, the city will have lost one of its most remarkable industries without replacing it. While there is scope for governments to support cleaner, more efficient production, they must be careful not to push out the very drivers of growth. This is especially true when pollution is simply moved to another region. Local C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 72 governments should pursue policies that tackle market externality while supporting local companies.
One opportunity for Foshan is to upgrade its energy sources. In our discussions with local ceramics manufacturers, the lack of access to clean energy emerged as a key obstacle to improved productions processes. Natural or clean coal gas could greatly reduce emissions of sulfur and harmful dust, as well as improve energy efficiency. However, access to and distribution of both kinds of clean energy cannot be addressed without government action.
There is no reliable supply of natural in Foshan due to a monopoly by a local energy supplier. Compared with other cities, Foshan’s natural gas is the most expensive in China. Big state suppliers such as Chinese National Petroleum Corporation are not permitted to enter local markets.
Local equipment producer Keda has already successfully invented and commercialized equipment to produce clean coal gas. Management says it has the capacity to provide stable, affordable supply for local industry for about two yuan per cubic meter -‐ half the cost of natural gas. However, the dispersal of the ceramics factories has made it too costly for Keda to build the necessary delivery infrastructure. Thus, any solution will require coordination with governments 4.7
SERVICES-‐ORIENTED D EVELOPMENT Associated with China’s economic transition, discussed in section 4.6, is an effort to increase the contribution of services. This is led by the central government directing the tiaotiao lines of control to ensure local authorities find creative and locally relevant means of adjustment. Despite its traditionally industry-‐
dominated economy, Foshan has responded actively such as investing in the Foshan Sino-‐German Industrial Services Zone. In Foshan, labor-‐intensive, low value-‐added, dispersed clusters are considered “old growth”. It is trying to develop a new model based on high value-‐added, concentrated offices, high productivity, low transaction costs and a strong services sector. To make that transition, the government needs to provide both hard and soft infrastructure. Among its hard-‐infrastructure responses is the construction of a “New City”. In relation to soft infrastructure, it aims to learn from Germany, which has a proven record with services SMEs. As part of this strategy, it has invested in the Foshan Sino-‐German industrial-‐services zone. Case study: Foshan Sino-‐German industrial services zone The 26 square kilometer Foshan Sino-‐German industrial-‐services zone is an exemplar of how China’s different levels of government work with the private sector and international partners. Guangdong Governor, Zhu Xiaodan, expressed C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 73 his hope in 2013 that the development will propel “city transformation and upgrading” and become a “demonstration area” (佛山新城建设管理委员会, 2013). The project aims to serve as an effective platform for the development of the services industry. It is a base for R&D institutes, testing and certification organizations, information technology, renewable energy and pharmaceuticals, among others. The target is to develop international standards and a business environment similar to Germany’s, encouraging industrial upgrading in southern China and the country as a whole. The zone will support enterprises and projects with the likes of taxation, capital and office space. The Guangdong provincial government has also designated Foshan’s efforts as a cooperative program with the Fraunhofer Society, a prominent European research organization. The zone includes the Foshan Industrial Technologies Institution of the Chinese Academy of Sciences, with the aim of making full use of domestic R&D capacity. It is also entails constructing a high-‐tech industrial services platform of 200,000 square meters for 300-‐500 high-‐tech enterprises and research organizations. By May of 2012, the Sino-‐German industrial-‐services zone had been designated one of a series of key development areas such as Guangzhou’s Nansha, Shenzhen’s Qianhai and Zhuhai’s Hengqin. In August 2012, it had been written into a joint statement on bilateral investment promotion signed by the Ministry of Commerce of China and the Federal Ministry of Economics and Technology of Germany, as part of a second round of consultations, signaling greater cooperation to come. Case study: Guangdong high-‐tech services zone for financial institutions Another key project is the Guangdong high-‐tech services zone for financial institutions in Foshan. Founded in 2007, it is the first of seven basic platforms aimed at developing the province as a strong finance center and the only province-‐level financial back-‐office services base approved by the Guangdong government. It hopes to attract back-‐office departments of financial institutions, finance-‐centered services outsourcing enterprises, and the headquarters and regional head offices of financial institutions.26 Guangdong Equity Exchange, established in the zone in July 2013, serves as a platform for promising enterprises in the region. Since its opening, more than 200 enterprises have listed, most of which are local enterprises. As the exchange grows and becomes more influential and private equity and other financial 26 http://www.f-‐hitech.com/eng/about.html C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 74 intermediaries begin to cluster, the zone will play a key role in financial innovation and upgrading of local enterprises. It remains to be seen how effective these efforts will be in deepening innovation and services within Foshan. The financial services zone has already attracted some large international players such as HSBC and Fujitsu, as well as numerous local companies. The German-‐Sino industrial-‐services zone is still under construction, so it is too early to judge its impact. However, there certainly exists a sizeable pool of demand. The industrial sector is responsible for more than 60 percent of the city’s GDP and most is still low-‐end manufacturing. If the zone can effectively adopt some of Germany’s success in upgrading and training talent, the dividends for Foshan will be substantial. Understanding the high stakes, Foshan officials are actively searching for best practices from all over the world for building both the hard and soft infrastructures for the zone. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 75 5 L A N D The Land Reform Law of China – published on June 30, 1950, one year after the establishment of the PRC – rescinded “ownership of land by landlords and introduc[ed] peasant ownership” (China.org.cn, 2009). This form of communal ownership persisted largely until the reform era, although its effects are still evident today. The transformation of institutions that govern land ownership, use and trade during the past 35 years has been central to the urbanization, industrialization and economic development of both China and Foshan. Public ownership of land is a socialist article of faith in China. However, a core principle of Chinese political philosophy – “concept of scientific development” (kēxué fāzhăn guān 科学发展观) – demands evidence-‐based policy. Few countries can demonstrate stronger evidence of the merits of private property than China. In Chapter 4, we explained how Foshan’s huge growth in industrial output drove a proportionately massive expansion of derived-‐factor demand for land. Because almost all land was communally owned, its use was highly regulated and trading was not allowed. Thus, political compromise was needed. The solution was to separate ownership from use-‐rights. Article 2, Chapter 1 of the Land Administration Law (1986) states: “The People’s Republic of China practices socialist public ownership of land, namely, ownership by the whole people and collective ownership by the working people … No units or individuals may encroach on land or illegally transfer it through buying, selling or other means. However, the right to use the land may be transferred in accordance with law” (china.org.cn, 1998). Thus, the people own the land, but the right to use it can be bought and sold. This is a perfect socialist-‐market solution (private ownership with Chinese characteristics) and it has resulted in one of the biggest allocative-‐efficiency gains in history. But use-‐rights are not unfettered. The government puts tight restrictions (conceptually similar to zoning) on how particular plots of land may be used. Land use rights are fundamental to China’s economic transformation. Steven Cheung (2009) identifies “the right to decide and allocate the use of land” as the primary source of economic power in China and notes that it is largely under the control of xiàn (县)-‐level governments27: 27 China’s bureaucratic hierarchy is not always consistent, nor does it translate well into English. We will usually refer to cities for simplicity. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 76 “[T]oday, the economic power by and large rests in the xiàns. The chief economic power does not rest in the villages or towns or cities or provinces or even Beijing but in the xiàns, for the reason that xiàns possess the right to decide and allocate the use of land” (Cheung, 2009, p. 63). Joe Studwell agrees with the basic premise, writing in his book How Asia Works (2013), that the first of three steps to economic development is reforming agricultural-‐land ownership to encourage high-‐yield farming. If the productivity of land is increasing, the economy is almost certainly growing. Control of land was most strongly established by the Land Administration Law (1986). Chapter 2 of the law requires ownership to be registered and approved at the county level (or higher). Chapter 3 assigns responsibility for determining land use to county authorities. However, this must accord with local-‐government plans, confirmed by provincial authorities and approved by Beijing. Foshan’s five districts are xiàns28. They use their land-‐distribution powers to drive the city’s development, while competing against each other at the kuaikuai level (explained in Chapter 2). Beijing has tried to use various tiaotiao lines of control to ensure Foshan’s land-‐use decisions support central objectives. One of the key methods is via the extensive planning apparatus that requires local land-‐
use plans to be in accord with those of higher-‐level governments, However, the districts’ competition for development – fueled by China’s promotion mechanism and the success of Hong Kong and similar markets – has motivated them to create market institutions that can govern land use without attracting unwelcome attention from higher authorities. Foshan has persistently pushed the limits imposed by higher levels of government to create a market-‐driven land economy and, thus, satisfy what the local authorities perceive to be Beijing’s primary goal of growth. How it has done so provides a fascinating glimpse into the institutional reform and renewal process that has sustained high growth since 1978. 5.1
HOUSEHOLD CONTRACT R ESPONSIBILITY SYSTEM One of the critical changes during the reform period was the household contract-‐
responsibility system. This aligned household and local and central government incentives towards growth. The official explanation of the system highlights two key features: 28 Their specific powers and authority not entirely consistent with other regional governments at an equivalent level. Foshan’s current governance structure emerged from negotiations as explained in Chapter 3. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 77 “First, farmland is still owned by the public. Second, production and management are entrusted to individual farming households through long-‐term contracts. During the contract period, the farmers pay taxes to the State and collective reserves to local governments, and keep all the other produce for themselves” (china.org.cn, 2014). The household-‐responsibility system may be the most famous example of China’s central-‐local experimentation and evaluation reform process, under which local solutions can inspire national institutional change. One of the most remarkable examples began in Anhui Province, where in December 1978 local cadres reportedly signed a secret and illegal pledge in blood with farmers from Xiaogang village, allowing them to manage and retain some of their produce. In exchange, the farmers agreed to care for the cadres’ families if they were punished for encouraging such limited privatization (Huang Y. , 2009). The result was a massive increase in crop yield. When reform-‐minded officials became aware of this unauthorized reform, they expressed strong support. Among them were the then-‐governors of Sichuan (Zhao Ziyang) and Anhui (Wan Li). These two successfully campaign in favor of the system, arguing that “it was socialist because the land still belonged to the collective” (Hou, 2009). With Deng’s approval, Zhao was later appointed Premier and Wan became Vice Premier, with a mandate to implement the system nationally. This they succeeded in doing in 1984 to the great benefit of millions. China’s rural population enjoyed the most direct boon. By this time, Foshan was already urbanizing, but the policy also was immensely positive for urban-‐
dwellers, albeit indirectly. With farms able to produce large surpluses with fewer workers, large numbers were freed to move to cities. In Foshan, this helped drive its labor-‐market revolution. This example of the interdependent development of markets is a recurring theme of the Foshan Story29. 5.2
LAND A DMINISTRATION LAW (1986) China adopted the Land Administration Law (1986) at the 16th Meeting of the Standing Committee of the Sixth NPC in 1986. It has been amended twice: by the Seventh NPC in 1998; and then by the 10th NPC in 2004 (China.org.cn, 2011). The law set out obligations for local governments in determining land use in accordance with provincial government priorities (which, in turn, support national policy). It is one of the primary tools of tiaotiao guidance of local land administration. Two distinctions established by the law stand out as critical for development: between state-‐ and collective-‐owned land; and between land for cultivation and that for construction. 29 We return to labor-‐market development in Chapter 6. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 78 Chapter 2, Article 8 defines ownership and use-‐rights in this way: “Land in the urban areas of cities is owned by the State. Land in rural and suburban areas is owned by peasant collectives [with exceptions]” (China.org.cn, 2011). Units (dānweì 单位) or individuals may hold use-‐rights to either state-‐ or collective-‐
owned land. Article 8 distinguishes between state-‐ and collective-‐owned land. This is crucial for development because use-‐rights for collective land typically cannot be traded and their transfer is tightly restricted. Article 63 states that “no right to the use of land owned by peasant collectives may be assigned, transferred or leased for non-‐agricultural construction”, although it cites some exceptions (China.org.cn, 2011). Article 63 establishes two types of land: one for which use-‐rights may be traded in more or less the usual way; and another for which such rights may not be traded. The value of tradable land is, naturally, much higher. The second major distinction is between land for cultivation and that for construction. Article 4 requires the state to determine general use, with “strict control … on the turning of land for farm use to that for construction use”. The article defines farm land as being “directly used for agricultural production” and construction land as that “on which buildings and structures are put up” (china.org.cn, 1998). Combining these two key distinguishing elements of ownership and use, the law places fewer restrictions on the use of state-‐owned land for construction purposes than it does on collective-‐owned property. In this way, it provides the main institutional constraint on local-‐government decisions about land use. Within those guidelines, they are expected to make decisions that support growth, motivated by competition. In Foshan, the competitive element often dominates the restraining element, with results we discuss below. 5.3
LAND U SE IN FOSHAN Most of the incentives for local-‐government officials support industrialization, given that their promotions are typically tied to their districts’ growth. China's main tax base depends on value-‐added activities. China’s main tax base is the VAT. Similarly, the more productive a piece of land, for example, the higher its land-‐use tax income. The same applies to the capital-‐gains tax collected exclusively by local governments. More productive land is also more valuable. As property sales are a major source of extra-‐budgetary revenue, local officials favor policies that increase productivity and, thus, land value. Industry growth in Foshan lifted land productivity (discussed in Chapter 4), resulting in new derived demand and pushing up its value. Seeing a chance to satisfy the growth imperative, Foshan devoted an increasing share of land for industrial and commercial purposes. Figure 5.1 shows how much agricultural C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 79 land was converted to construction and other uses in Foshan during the decade to 2005. Farm-‐use land fell from three-‐quarters of the total in 1996 to less than 60 percent, while that for construction rose from 20 to 30 percent. Land for other uses increased by five percent to nearly 10 percent of the total. percent Figure 5.1 | Land use in Foshan 100 90 80 4.1 9.7 20.8 30.8 70 60 Other 50 40 ConstrucZon 75.1 30 59.5 Agriculture 20 10 0 1996 2005 Source: 佛山市土地利用总体规划 1997 － 2010 (Foshan overall planning of land use) Local officials’ power to assign land-‐use rights was a major boon, but the scarcity of tradable state-‐owned land remained a hurdle. The initial endowment of such land was restricted to plots that were classified as urban when the Land Administration Law was enacted in 1986. At that time, most of Foshan (and China) was still rural, so most of the land was deemed to be the property of peasants’ collectives. Use-‐rights could be obtained but not transferred, which impeded market development. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 80 Box 5.1 | Chronology of key land reforms Before 1979 1950: Land redistribution; end of feudal system 1953-‐1958: Collectivization; conversion of private holdings into collective-‐owned land 1978: Household-‐responsibility system (HRS) After 1979 1980-‐1990: Informal land market 1986: Land Administration Law declares land a commodity rather than a public good 1987: First local village in Foshan establishes joint-‐stock company for collective land 1990-‐Present: Visible/formal land market 1990: State Council supports market exchange of state-‐owned land 1990: Foshan sets standards for trading collective-‐owned land 1992: Foshan sets standards for land-‐trading and requisition compensation 1994: Foshan sets floor price for transferred land 2000: Nanhai district is first in Foshan to establish land-‐reserve and exchange center 2001: National government grants land-‐reform pilot status to Shunde district 2007: Foshan issues “three olds” (sān jiù găi zào 三旧改造) urban-‐redevelopment policy Foshan devised two main solutions. First, the local government requisitioned land and reclassified it as state-‐owned and, thus, tradable. Second, it simultaneously turned a blind eye to the trading collective-‐owned land in an informal market. Foshan pushed the limits imposed by the central government in favor of the higher priority of growth. In the process, it pioneered institutional changes that helped sustain China’s development over decades. Foshan created its main supply of tradable land through state requisition and reclassification of communal land. Article 2 of the Land Administration Law empowers the state to “expropriate or requisition” land. Local authorities are able to requisition small plots with the approval of their provincial government. However, they need the permission of the State Council before requisitioning larger plots (35 hectares and above in the case of farm-‐use land; 70 hectares and above for other-‐use) or high-‐quality property that is deemed “capital farmland” Requisitioning provided Foshan’s county and later district governments with assets they could offer investors at low prices. It also gave them access to land on which critical infrastructure could be built (see Chapter 7). As Foshan’s economy continued to grow, the increasing proportion of land that became tradable brought other key benefits. Transferable land rights contributed to the development of the country’s property-‐rights institutions, generally. The transfer of use-‐rights has to be registered with the local land-‐
administration department, so clear definitions and delineations of property are necessary. As more land was put onto the formal market, property rights across an increasing area of the city became more clearly defined. Clearly defined and tradable rights meant owners could use their land as collateral for loans, stimulating the demand for financial services and a more C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 81 sophisticated financial market (see Chapter 8). As well, aspirational skilled workers significantly boosted the demand for property. Thus, the formal land market provided an incentive for talented workers to stay in Foshan (see Chapter 6). However, not all land was put onto the formal market. A second source that helped drive industrialization came from the informal market for collective-‐
owned land. Because these use-‐rights cannot be traded, such property is much cheaper than state-‐owned land. Collectives’ land use is usually restricted to agriculture, homes for members of the collective and commercial buildings for TVEs that belong to the collective. Given Foshan’s geographic proximity and ancestral ties to Hong Kong, it is no surprise that locals would find market-‐based ways around the restrictions on accessing collective-‐owned land. The city’s officials turned a blind eye to the informal market for such property. Foshan’s designation as an arena for market-‐
experimentation largely protected them from close scrutiny – and the results were impressive. Because the law does not allow the transfer of use-‐rights for collective-‐owned land, purchasing such rights in a shadow market is risky. Indeed, the authorities may be obliged to demolish any structures built on such land if it attracts adverse attention in the wrong places. Under the current anti-‐corruption campaign, some of the deals done in the early days between local officials and industrialists may come under investigation, especially if those involved are out of favor. Thus, prices of collective-‐owned land are much cheaper than for state-‐
owned land and the market remains informal. But this market served several important purposes in Foshan. First, although foreign investors and national SOEs might have considered the city’s formal land market to be cheap, it was unaffordable for most local entrepreneurs, who typically had little capital and minimal access to financial markets. By dramatically lowering the cost of entry into the city’s new market economy, the informal land market supported the development of many local private businesses. Foshan’s economy today is dominated by industrial-‐sector SMEs (see Chapter 4). Low entry costs are critical to the establishment and dynamism of such an economy. Second, collective-‐landowners took advantage of lax enforcement of regulations to lease their properties at prices below those for state-‐owned land. The household-‐responsibility system introduced at the beginning of the reform period created surplus labor. However, low-‐skilled workers could only move if accommodation was affordable. The informal market in collective-‐owned property helped satisfy this demand. In this way, collective-‐owned land provided C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 82 a de facto supply of affordable housing (see the Stone Village case study in section 5.4.1). Third, this informal market improved the bargaining position of residents in respect to compensation for requisition. The law requires local governments to compensate owners for lawful requisition, based on the estimated value at the time. Article 47 states that “land expropriated shall be compensated for on the basis of its original purpose of use” (China.org.cn, 2011). Local authorities have some flexibility to negotiate the compensation, but the law sets expected and maximum levels, which are tied to previous living standards and property values. This is at the heart of many of the disputes between local people and officials. By facilitating more productive, albeit not technically legal, land use, the informal market enabled owners to argue for higher values and, thus, better compensation. This is reflected in the compensation payments summarized in Table 5.2. Consequently, the wealth increase from rising land values was distributed somewhat broadly across Foshan, contributing critically to the development of a local middle class with a vested interest in ongoing institutional development. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 83 Table 5.1 | Key dates in China's land requisition-‐compensation reform 1954: Constitution empowers the state to requisition, expropriate and nationalize land 1979: Foshan issues its own rules for land requisition, including financial compensation, job-‐placement programs, rural-‐to-‐urban hukou transfers and land usufruct30 1982: National regulations enforce state’s rights to requisition land, requiring original users to satisfy state’s development needs rather than protest or obstruct 1986: Land Administration Law provides legal definitions and standards for requisition; restricts requisition to government-‐approved construction projects or those in fixed capital-‐investment plans 1992: Foshan standardizes land usufruct policy, stipulating the return of 8-‐15 percent of requisitioned land, despite an absence of such a policy nationally 2001: Foshan granted reform-‐pilot status for land requisition, giving city government legislative scope to innovate and experiment with compensation standards, as well as requisition and resettlement procedures 2004: Foshan standardizes requisition and resettlement procedures; includes social security as part of compensation Table 5.2 | Compensation for land requisition in Foshan (1979-‐2002) 1979-‐1986 1986-‐1987 1988-‐1991 1992-‐1999 2000-‐2002 Land value (RMB/mu) Compensation (RMB/mu) Compensation as percent of land value 18,000 25,000 40,000 55,000 75,000 — — 11,520 11,520 24,000 0 0 29 21 32 Source: Foshan City Record (1979-‐2002) Volume 1. Regional Record Press, 2011, p.393 Case study: Lingnan Tiandi – Cooperation between state and private sector Lingnan Tiandi is a renovation project in Foshan’s city center encompassing Donghua Lane the Foshan Ancestral Temple, two nationally historical sites. The project was made possible only through the joint effort of private developers and the city government. Covering 64 hectares of land, with 1.5 million square meters of floor space, the mixed-‐use development is intended to revitalize the area. While preserving venues for Cantonese opera, martial arts and pottery, it provides new community facilities, as well as residential, office, retail and hotel development. 30
Usufruct rights entitle the holder to use and profit from a property, but are broadly restricted
for other purposes including ownership and alteration.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 84 It is designed with a low-‐carbon focus to minimize its environmental impact and to help create a sustainable community. The project began in 2007, as part of urban redevelopment by the Chancheng district government. Shui On Land, a developer based and listed in Hong Kong, won the use-‐rights via open-‐market bidding for RMB7.51 billion (about RMB5,000 per square meter of the project’s area). This provided the district government with the funds needed to prepare the land for redevelopment, including relocating and compensation of residents and demolition. No single private-‐sector stakeholder could have undertaken the task, as it involved dealing with more than 9,000 households and over 30,000 residents. An ongoing project, Lingnan Tiandi remains a top priority for the Chancheng authorities, who hope it will drive new economic growth and opportunities for the neighborhood, while preserving the area’s identity in the face of the city’s continuing urbanization. 5.4
R ISING LAND V ALUES Industrialization has boosted land productivity and, consequently, prices. This has been a principle source of wealth-‐creation for Foshan’s villagers, since the land they collectively owned has become a source of substantial rents or capital gains. Even where land remains collective-‐owned, villagers have found innovative ways to capitalize on the inherent value of their land. The results are clearly demonstrated in Figure 5.2. Thousand RMB Figure 5.2 | Sources of Foshan’s wealth growth (2005-‐2010) 350 300 250 200 150 100 50 -‐ 2005 2006 2007 Property value per capita Disposable income 2008 2009 Deposit per capita GDP per capita 2010 Source: CEIC C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 85 However, there is no guarantee that villagers will capture the full value of their land. Corruption and extortion are not uncommon across the country and Foshan is no exception. Figure 5.3 provides a simple depiction of how collective-‐owned rural land is sometimes capitalized in Foshan, despite the lack of transferrable use-‐rights. Collectives are entitled to form TVEs, which can transform collective-‐owned land in almost any way, so long as the land-‐ and TVE-‐owners are the same collective. The results include the construction of factories, shopping malls and other entrepreneurial activities. These can then be leased to generate rent for the TVE owners. Figure 5.3 | Revenue model for collective-‐owned rural land Source: FGI analysis In this way, the villagers form a collective-‐owned corporate legal entity. Shares are allocated among them, with a restriction that they may only be traded with other shareholders. Distribution of dividends varies and is difficult to determine, but the outcome is clear. In Foshan and elsewhere, collectives have found a legal loophole that allows them to convert their assets into a share-‐based corporate enterprise, raising the productivity and value of their land. The practice is encouraged by Foshan’s district governments as it can help increases their competitive edge over other local areas. As well, they can tax the value-‐added component of any business activity or, subject to compensation, nationalize the land and collect a share of the capital gains. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 86 However, economic growth and social well-‐being are not the only results. The process by which Foshan allowed collective-‐landowners to effectively rent land for non-‐agricultural purposes linked the creation of many enterprises to specific locations. Consequently, it acted as a centrifugal force in Foshan’s economic geography, encouraging the distributed development that is such an unusual characteristic of the city and ensuring the benefits of rising land values were widely distributed. Some evidence for this is presented in Table 5.3, which shows that Foshan’s five districts are each home to considerable numbers of firms. Table 5.4 shows land prices for different property types in each district, as well as the average price across the city and property types in Q1 2011. Although most firms by far were located in Nanhai, it is also one of the largest districts and features many industrial clusters (as discussed in Chapter 4). Chancheng had the highest average property price in 2011 for all types. As expected, commercial property had the highest value across the city. Table 5.3 | Number of enterprises by district in Foshan (1980-‐2002) 1980 Chancheng Nanhai Shunde Sanshui Gaoming Total 334 513 428 204 261 1,740 (19%) (29%) (25%) (12%) (15%) 1990 1,404 10,461 5,227 1,675 2,142 20,909 (7%) (50%) (25%) (8%) (10%) 2002 4,833 15,620 9,236 1,788 1,268 32,745 (15%) (48%) (28%) (5%) (4%) Note: Percentage values indicate share of total Foshan-‐registered firms in each district Source: Foshan City Record (2002), Volume 1, p.195 Table 5.4 | Land prices by property type and district in Foshan (Q1 2011) RMB / m2 Chancheng Nanhai Shunde Sanshui Gaoming Average Commercial 6,530 6,268 6,335 3,758 3,393 5,257 Residential 4,888 4,230 2,528 1,946 1,870 3,092 Industrial 606 460 578 361 340 469 Average 4,008 3,653 3,147 2,022 1,868 Source: Land Price Survey of Foshan City Report Rising land prices contribute to local-‐government revenue While a large share of rising land values has accrued to villagers, the district and municipal governments also benefit. Indeed, they provided an important source C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 87 of financing for infrastructure projects (see Chapter 7). The rising contribution of land sales to Foshan’s total budget revenue is revealed in Table 5.6 and compared with national figures in Table 5.5. Although land sales contributed just 9 percent of China’s local-‐government fiscal revenue in 1999, it has become increasingly important. By 2007, it accounted for more than half of local-‐
government revenue, growing to 67 percent by 2010 and has eased to about 60 percent in recent years. Land revenue provided an even higher share of Foshan’s budget revenue, reaching 83 percent in 2013. Table 5.5 | Land-‐finance trends in China’s local government Year Nationwide local-‐government land revenue (RMB billion) Nationwide local-‐government budget revenue (RMB billion) Land revenue as a share of budget revenue (percent) 1999 51.4 559.4 9 2000 59.5 640.6 9 2001 129.5 780.3 17 2002 241.6 851.5 28 2003 616.1 984.9 63 2004 589.4 1,189.3 50 2005 550.5 1,510.0 36 2006 767.6 1,830.3 42 2007 1,300.0 2,357.2 55 2008 960.0 2,865.0 34 2009 1,591.0 3,260.3 47 2010 2,710.0 4,061.3 67 2011 3,150.0 5,254.7 60 2012 2,690.0 6,107.8 44 2013 4,200.0 6,896.9 61 Source: NBS; Ministry of Land and Resources; Caijing Magazine Table 5.6 | Land finance trends in Foshan Land revenue (RMB100 million) Foshan budget revenue (RMB100 million) Land as a share of budget revenue (percent) 2010 193 306 63 2011 271 342 79 2012 278 384 72 2013 365 438 83 Source: NDRC (2013); Foshan statistical yearbooks C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 88 This form of financing has been hugely important for Foshan’s and China’s investment-‐driven growth, but it is clearly not a perpetual revenue stream. There is no intrinsic problem with making use of finite revenue sources, so long as their expiration is clearly planned for. It is important for the central government to consider other land-‐based revenue sources for future local-‐
government financing. Pilot schemes for forms of property tax were initiated in Chongqing and Shanghai in 2011 and may provide useful examples. Asset-‐value depreciation is among the risks of excessive reliance on a single asset class. In terms of land, this may be a real risk for some local governments. 5.4.1
Case study: Stone Village land-‐ownership innovation Stone Village in central Foshan provides a different model for villagers to capitalize on land appreciation. It is home to more than 3,000 villagers and 15,000 migrant workers. The villagers have become relatively wealthy by working creatively with the district government to establish property rights within a hostile legal and political environment. The villagers and district authorities agreed to nationalize the collective-‐owned land. However, by allowing the villager committee to retain use-‐rights, the villagers gained de facto transferrable property ownership – a potentially more valuable asset than shares in a TVE and one that could be used as collateral for debt. Having established tradable property rights, the village committee and local government approached developers to raise capital in the open market to redevelop older homes. A joint-‐stock company was created to manage the redevelopment, with the village providing 150,000 square meters of land and the private developer contributing RMB1 billion. The redevelopment set aside 85,000 square meters for commercial and residential property and 65,000 square meters for a hotel, offices, parks and shopping facilities, requiring 44,000 square meters of old buildings to be demolished and 130 households relocated. Total rents in the village rose from RMB2 million to RMB10 million after redevelopment, with the committee and villagers profiting as landowners. In interviews with the committee, we were told that relocated residents now live in “luxury apartments” in the village. Both relocated residents and those who were able to stay in the new development receive dividends from the joint-‐stock company that manages the project. In essence, Stone Village is a residential-‐
commercial hybrid enterprise in which each original resident has equity. The project is presented as a case study of successful collaboration between villagers and district authorities to create formal, transferrable property rights by transferring collective-‐owned land to the state. Locals benefit from retaining use-‐rights and from increasing land values due to the redevelopment under a C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 89 public-‐private partnership. Importantly, it demonstrates critical elements of China’s reform: the creation of formal, legal property rights to replace collective-‐
owned assets; the use of a legal enterprise system to transfer collective-‐owned assets to the market; and the guided competitive local autonomy that facilitates, encourages and restricts this transition. 5.5
PROBLEMS EMERGING FROM T HE LAND M ARKET As in other sectors, the institutional change in China’s land market has produced some undesirable as well as beneficial results. Some of these have attracted considerable global attention, especially concerns about property-‐price bubbles and local government dependence on land financing. Meanwhile, issues such as disputes arising from unclear property rights are mostly local concerns. Below, we discuss some of the challenges arising from the institutional transition within Foshan’s land market. 5.5.1
Property disputes Although competition among local governments helps the land market evolve and brings positive consequences, problems have also emerged. Tiáo-‐kuài dynamics have resulted in local-‐government policies forging ahead of – and sometimes conflicting with –national guidelines and even laws. The informal market for collective-‐owned land also presents a challenge in terms of dispute-‐
resolution mechanisms. Disputes over collective land are a major problem for enterprises attempting to use formerly collective land as collateral for bank loans or as assets when listing on stock exchanges. Although the Foshan government allows an informal market for collective-‐land trade, problems arise when owners want to sell the land beyond the city’s jurisdiction. Foshan and other local governments tolerate the existence of this market because it supports local development. However, courts enforce laws, not local-‐government indulgences. When disputes arise, the courts do not uphold informal land transfers. Some firms have taken advantage of this by withholding final rent payments, while others have been evicted without notice. These actions devalue collective-‐owned land. They are also a source of disputes that are not easily and satisfactorily resolved. These examples of institutional failure demonstrate the necessity for further reform. To resolve the problems arising from these types of disputes, the State Council issued Document Number 28 (2004), which declared that collective-‐
owned construction land could be transferred if its use was consistent with government planning. In 2006, the Ministry of Land and Resources encouraged local experimentation of collective-‐land exchange by formally allowing the transfer of collective-‐land rights. China’s institutional evolution and C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 90 marketization often progress in this manner: local problems, which are often created due to friction with central authorities, are addressed and solved as they arise. 5.5.2
Reduction of arable land Assigning use-‐rights is one local-‐government tool to encourage industrialization, as discussed earlier. In Foshan and elsewhere, collective-‐ and state-‐owned land was transferred to industry at very low prices. This form of subsidy distorted producers’ cost structure, encouraging overconsumption of land relative to other factors and intensive use of land in production. The consequences are reflected in floor space-‐to-‐land area ratios. For example, whereas industrialization in Nanhai has been intense, many factories there use as little as 27 percent of the land they occupy. Similarly, the centrifugal forces discussed in section 5.4 that are responsible for dispersing the gains from Foshan’s rising land value reflect that industry is spread across the city in clusters, attached to former counties and homesteads. The Land Administration Law (1986) prohibits reductions in the share of arable land within a government jurisdiction. However, this is in tension with three key forces: the efficient allocation of land required to increase productivity; the welfare of the people; and the key priority of economic growth. Consequently, a mechanism exists whereby governments can trade their quotas of arable land with others at the same level or, within the same jurisdiction, at the next highest level31. The transaction costs inherent in this mechanism provide an incentive for local governments to simply ignore the prohibition. Any punishment would probably either be minor or externalized, whereas the benefit of achieving growth targets is major and substantially internalized. As a result, China has seen a substantial loss of arable land due to the cumulative effect of many local authorities pursuing such a strategy. With each of China’s local governments in competition for the same objectives, coordination becomes a challenge. Not every locality is an ideal place for a large city or industrial hub. Economic geography means some places simply make better agricultural regions, while cities are best suited elsewhere. Existing incentives create a tendency towards excessively prescribing land for industrial use because that often generates the highest local revenue and growth. But 31 This means, for instance, that Foshan could trade with Dongguan (another city in Guangdong) to reduce its arable land and enable Dongguan increased its, thereby ensuring the province’s total remained unchanged. However, it could not do so with, say, Xiamen, in neighboring Fujian Province. To achieve such a deal, Guangdong would have to trade with Fujian and the provincial governments could then allocate the redistributed quota. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 91 China needs to retain enough arable land to ensure sufficient food production. Reverting industrial land to agricultural use is a poor substitute because it is typically so damaged that any food produced will be of poor quality and possibly even unsafe. 5.5.3
Land finance The risk to Foshan’s balance sheet from a sharp decline in local land prices was raised earlier in our discussion on the importance of land as a source of revenue for the city. How real and significant is this risk? First, at the local level, we need to consider if land and property in Foshan is overvalued. Second, at the national level, we need to evaluate the likely impact of a central-‐government response if Beijing were to decide that prices have become excessive generally. These two elements could act in opposite directions to squeeze highly indebted local-‐government fiscal accounts, threatening their debt-‐servicing capability. Were revenue from land sales to decline faster than new lines of revenue emerged, the extent to which land-‐sales proceeds are used to service existing debt or other obligations, rather than new project, would determine the extent to which local-‐government solvency was exposed (see Chapter 8 for further discussion of Foshan’s government debt). Table 5.6 shows the extent to which Foshan’s budget is exposed to land revenue. It was as 72 percent in 2012. Such concentrated exposure to a single source of revenue is clearly of concern. Diversifying revenue streams should be a priority for Foshan – even more so than for the country as a whole, for which land revenue was equivalent to 44 percent of budgetary revenue in 2012. This is still high, but not to such a troubling extent. Local conditions are not the only factors that may move property prices in Foshan. If Beijing acts through monetary policy or financial reform to raise interest rates and tighten credit supply, borrowing would fall, constraining investment in property and, thus, placing downward pressure on prices. The same outcome could be achieved through the sort of direct market interventions sometimes favored by the Chinese government. In the case of monetary or direct intervention designed to cool the property market nationally, Foshan could find itself in trouble. Table 5.7 shows property prices in Foshan and other key cities relative to prices in Hong Kong and Foshan, as well as GDP per capita relative to Hong Kong. Foshan’s GDP per capita was already 40 percent that of Hong Kong’s in 2012 and about on par with those of Beijing, Shanghai and Guangzhou. However, its property prices were only 11 percent of Hong Kong’s and half those of the other C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 92 major cities. Although these metrics are not perfect, we believe they provide some evidence that Foshan property is affordable – at least compared with other key Chinese cities. The other point highlighted by the table is that, although some cities seem to have affordable property, others do not. Affordability is not a perfect indicator of a bubble, but it is a partial indicator of the underlying value of an asset. Thus, property that few locals can afford may be overvalued, although some markets such as Beijing and Shanghai may be more responsive to national than local demand). This discussion suggests that the existence of property bubbles may be a local phenomenon. Foshan appears not to be directly experiencing one. Table 5.7 | Property prices in select cities (2012) GDP per capita As % (RMB) of HK Property price (RMB/sq m) As % of HK As % of Foshan Hong Kong (Kowloon) 228,938 100 74,773 100 928 Foshan 91,259 40 8,056 11 100 Beijing 87,475 38 16,845* 25* 210* Shanghai 85,373 37 14,061 19 175 Guangzhou 105,909 46 13,163 18 163 Shenzhen 123,247 54 19,590 26 243 Note: * 2011 data Source: CEIC, World Bank Databank; http://www.rvd.gov.hk/en/property_market_statistics/index.html; FGI analysis C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 93 Table 5.8 | Property prices in Foshan (2002-‐2013) Year Property price Residential property price (RMB/sq m) (RMB/sq m) 2002 923 n.a. 2003 2,592 n.a. 2004 2,895 n.a. 2005 3,386 3,218 2006 3,863 3,760 2007 5,280 5,275 2008 5,385 5,366 2009 6,256 6,204 2010 7,545 7,648 2011 8,039 8,207 2012 8,056 7,958 2013 9,062 8,837 Source: CEIC The impact on property prices is not the only risk associated with the central government’s macro policies. Monetary policy or financial reform that raised interest rates through tight credit supply, for example, could adversely affect local governments by increasing their debt burdens directly. High leverage, rather than just high property-‐market exposure, is a substantial risk for China’s local authorities. The structurally uneven distribution of exposure to these risks means macro policies may not be the most appropriate tool for China to use in response to local property inflation or local-‐government leverage. A policy that increases debt burdens may harm local governments that responsibly take on debt to finance productive investments. Meanwhile, constraining the national property market could harm local areas that depend heavily on property, even if their property markets are not at all overvalued. 5.6
CONCLUSION Demand for clearer land rights comes from many sources, including various departments and levels of the Chinese government. The result of the country’s 1994 tax reforms (see Chapter 4) is that a significant portion of revenue now comes from land taxes and fees, although the largest portion remains the value-‐
added tax. Consequently, the national government needs a clear picture of land ownership to determine tax obligations. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 94 As local governments’ dependence on land sales for revenue (discussed in Chapter 8) has become a major concern for Beijing, efforts are under way to create the institutional capacity required to shift from land-‐sales income to property tax. Although pilot schemes were initiated in Chongqing and Shanghai in 2011, the technical and institutional demands for administering such a tax remain substantially high. In August 2014, the central government announced its intention to create a national property registry. This will formalize land rights with a high degree of precision and may act as the basis for more sustainable local-‐government revenue, demonstrating the role of government tax necessity as a demand for improved property rights. Whether or not it successfully resolves this, China will proceed in its usual manner: motivated but also constrained by Beijing, local authorities will drive incremental reform that is subsequently evaluated and joined with higher-‐level reforms. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 95 6 L A B O R : T H E H U M A N F A C T O R Adam Smith reminds us that “all production is for the sole end and purpose of consumption.” Extending this view, we could say that the sole end and purpose of economic growth is to improve living standards. Thus, labor is a unique factor of production because the supplier is also the final consumer, whose welfare is paramount in economics. This is achieved via a web of contracts with firms that employ and coordinate labor to make more efficient use of people’s efforts. It is not only a fascinating process but crucial to the functioning of both economy and society. That web is governed by institutions, which is why their correct functioning is so important. The ongoing improvement of China’s institutions is both a major source and significant consequence of the country’s economic growth. Understanding the development of institutions governing households and labor markets is necessary for a complete understanding of the workings of China’s economy and society. Households comprise individuals or families who invest in education and skills, supply labor to firms and consume products and services while participating in society and politics. Households and firms interact with and are regulated by institutions such as government. This web of relationships is depicted in Figure 6.1, which identifies areas of the labor market that must work symbiotically. Figure 6.1 | Theory of the household: Web of contracts Source: FGI analysis C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 96 Well-‐functioning labor and social institutions should encourage healthy relationships throughout this web. If a household does not have access to education, for example, no amount of additional housing or better healthcare will increase its fortunes. This is because its members will be unlikely to secure jobs that pay enough for them to take advantage of such opportunities. Matching labor demand with supply happens only if people have the necessary skills. If these skills cannot be imported, they must be developed. This requires education and training. However, China virtually dismantled its entire higher education system during the Cultural Revolution in pursuit of a diktat that “educated youth must go to the countryside to receive re-‐education from the poor and lower-‐middle-‐class peasants32”. When the reform era began in the late 1970s, education and training had to start almost from scratch. There was a similar vacuum in terms of adequate or even existing laws and regulations for the labor market, contracts, dispute-‐resolution and workers’ rights. The Labor Law (2008) largely redressed this deficit. Labor is not an inanimate factor of production but the effort of people who live in families and exist in a social environment. Thus, personal finance, housing, healthcare, clean air and water and safe food must be accessible. Otherwise, people are more likely to migrate in search of them, creating a labor shortfall. Finally, people need well-‐functioning infrastructure to facilitate living in a city and attending their employment, as well as to connect them with the other social and economic elements mentioned above. All these elements affect labor supply. If any of them is inadequate, the supply of people with the necessary skills, knowledge and abilities is unlikely to meet the demand or will be available only at a high cost. At the start of China’s reform period, most of these key elements were inadequate, inappropriate, archaic or largely absent. People either worked for SOEs or were peasants. Today, China produces some seven million graduates each year (Huang & Bosler, 2014), many with highly specialized skills. This is why it can now regularly send táikōnauts into space, plan and build mega-‐cities and fairly successfully manage one of the most complicated economies the world has ever seen. A critical element of the communist era was the so-‐called iron rice bowl (tiě fàn wǎn 铁饭碗) system, whereby the state guaranteed everyone job security and basic welfare. The tradeoff was that people were assigned to SOEs, with neither the worker nor employer having any say in this and no right to terminate the employment or pursue their own arrangements. Indeed, under the planned 32 Zhishi qingnian dao nongcun qu, jieshou pinxiazhong nongde zaijiaoyu! 知识青年到农村去,
接受
贫下中农的再教育! C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 97 economy, there was no labor market at all, the Cultural Revolution had undermined education and migration scarcely existed. This system persisted until “opening and reform” fundamentally changed the economic environment (Lauffs, 2008). At the beginning of the reform period, however, the central government lacked the capacity to lead labor reform. It had to wait for solutions to emerge from below. Thus, even as industry responded to “opening and reform” and the demand for labor expanded massively (discussed in Chapter 4), there was no automatic market-‐driven increase of supply. The transition required the creation of a labor market, training workers and then matching them to employers. Foshan responded fairly well, based on one key measure. It succeeded in attracting huge numbers of migrant workers – to such an extent that they now account for half of its entire population. Might things have been different? China’s opening to global markets resulted in a massive demand for unskilled labor and thus, the establishment of a labor market. However, there is far more to the story. Some of the key directives and implementations of labor-‐market reforms and their impact are summarized in Table 6.1. This chapter examines how these were achieved. It identifies the key policy developments as the authorities in Foshan sought to establish a workforce with sufficient and appropriate skills and a labor market that efficiently matched supply and demand. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 98 Table 6.1 | Select labor-‐reform implementations and impacts on Foshan Central directive Guangdong response/directive Foshan implementation Impact on Foshan Guangdong and Fujian approved as experimental zones SOEs directed to use labor contracts Markets opened to foreign investment and trade Directive ignored across most of China Authorities organize introductions of workers to employers Workers attracted from surrounding areas; population rise Greater retention of high-‐demand migrant workers 1995 1999 Labor Law Foshan authorized to test labor-‐market development reforms 2008 2009 Employment Contract Law Reassignment of some high-‐demand migrant workers’ hukou to Foshan Modernization of labor market; construction of information systems “Double transfer” policy introduced 2010 Introduction of migrant-‐worker “accumulative scoring” hukou 2014 Employment Contract Law revised Guangdong rural workers lured to Foshan for training and jobs; 15,000 trained in 2009 and in 2010; later tails off Greater retention of high-‐demand migrant workers (28,000 gain Foshan hukou under the scheme by 2012) 1982 1986 1991 Increased labor-‐
market efficiency Source: FGI analysis 6.1
CREATING A LABOR M ARKET Foshan’s first labor-‐market challenge was attracting workers to produce goods at sufficiently low costs to capture a significant share of global markets. In 1978, most people in Foshan either worked for SOEs or were peasants. Under central planning, people were told where and for whom to work, what to do and for how much. They were not allowed to seek their own employment. The “reform and opening” that began in 1978 largely ended that system. Demand for factory workers began changing the labor market, although there was no sudden easing of the rules. Cai, Park and Zhao (2008) note that regulations preventing farmers from freely working in nearby towns, even in TVEs, were not relaxed until 1984. Since such central policies consistently lagged economic needs33, many “grey” labor-‐market activities emerged. 33
This is an element of China’s growth model. Reality consistently outpaces regulations, which typically formalize and endorse (or explicitly ban) what has become established practice.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 99 Central to our understanding of China’s local economies is competition among cities and regions. This is a key element of the tiáo-‐kuài relationship and explains why economically beneficial “grey” activity is often tolerated by local officials. Foshan initially drew primarily on its own rural population as a source of urban workers. The city’s industrialization created a dual economy similar to that first described by Arthur Lewis (1954). Profits from industrial labor are typically substantially higher than those from unskilled agricultural work. Consequently, industry can afford to pay higher salaries, luring workers from the countryside. To be sustainable, such a critical structural change required institutional reform. 6.2
EDUCATION A ND V OCATIONAL T RAINING Allowing people to seek their own employment may have been a politically difficult decision, but its implementation was relatively simple. Conversely, training people to work in the newly emerging economy was politically uncontroversial, but its implementation was very difficult. Having dismantled its higher education system during the Cultural Revolution (Meng & Gregory, 2007), China needed to reverse course. The early stages of industrialization did not require much more than rudimentary vocational skills. However, in 1978, Foshan lacked a sufficiently large workforce with even that degree of basic training. Rebuilding the city’s education system progressed through three broad stages: unregulated competition (1980s); regulated competition (1990s); and collaborative innovation (post-‐2000) (NDRC, 2013)34. Factories and firms seeking workers provided the initial solution. They trained people to use their equipment in-‐house – often in the evenings. Those who proved adept were then put on the payroll. Records from Shunde and Nanhai show that vocational-‐training markets became well established in these two districts as early as 1979. These markets emerged without central (tiáotiáo) direction, driven initially by market demand. However, the district authorities (kuàikuài) recognized the importance of skilled workers in attracting FDI and expanding local output. Subsequently, the city government helped the expansion of training centers by granting land tied to such use, substantially subsidizing their establishment. 34
The NDRC report uses phrases that directly translate as “disorderly competition”, “orderly competition” and “collaborative innovation”, but the implications are better conveyed with reference to regulation.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 100 In 1979, for example, the Shunde labor union (a party-‐affiliated organization, rather than an independent Western-‐style NGO) opened a part-‐time vocational school with 366 students, taught by factory technicians. One year later, enrolment in local labor-‐union vocational schools in Foshan exceeded 20,000 (NDRC, 2013). Most organizations, both private and public, that had the need could establish their own programs, usually with short pre-‐employment courses. These changes represent a major institutional evolution in Foshan’s labor market. Already, it had changed from a centrally directed workforce, with most training being political, into one where participation in new sectors was allowed and training centers were established by both firms and district authorities. The traditional incentives for local and district authorities to compete outweighed resistance to change. Markets do not always function well, especially when the institutions governing them are changing rapidly. Establishing vocational training was not always productivity-‐enhancing. Some government agencies saw an opportunity to collect rents by establishing their own “training programs” that were, in effect, a way of charging applicants for the right to apply for jobs. The matrix presented in Figure 2.2 characterizes these attempts at rent-‐seeking as a form of government failure. The dynamic system of China’s tiáo-‐kuài relations creates scope for such an outcome since the same space for institutional development is needed for positive, market-‐enabling innovation. However, when particular local-‐government actions are identified as contrary to the guidance or wishes of higher levels, the lines of control (tiáotiáo) are expected to exert their authority. Ideally, they restrict actions that lead to institutional failure (whether of government or market). However, as with any system, there are no guarantees. The misapplication of authority for corrupt or political reasons remains a risk. In the case of spurious vocational training, the governments of Shunde and Nanhai, where most education services existed, responded with more stringent regulation of the sector. The continuous process of experimentation, adaptation and regulation in the development of vocational training in Foshan is a perfect example of how China’s reform-‐driven growth model operates. 6.3
TRANSITION T O SUSTAINABLE JOBS Foshan’s labor market has been demand-‐driven since the beginning of the reform period, when industry expanded in response to its new access to global markets. The previous section discussed the creation of a training market in Foshan. The next stage of a labor supply chain requires matching workers with employers. Two major institutional changes were required to liberalize China’s labor market: reforms in the planning of both its labor geography and market. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 101 6.3.1
Reforming China’s labor geography Under the planned economy, decisions about where to live were not influenced by the market because there was none. People lived where they were born, with the government tightly restricting their movement. Thus, one of the earliest challenges for Foshan and other pioneer cities once restrictions began to be eased was that people did not live near where economic opportunities existed. In 1983, Foshan implemented a recruitment program to “introduce” firms to workers from neighboring areas, effecting some 27,000 such introductions. In 1991, the city began an experimental program known as “opening and developing rural and village labor force for industry” (Zhōngguó nóngcūn láodònglì kāifā jiùyè shìdiǎn 中国农村劳动力开发就业试点), with TVE employment permits (Xiāngzhèn qì yè yònggōng xǔkě zhèng 乡镇企业用工许可证) to manage rural labor. Within two years, more than 90 percent of Foshan’s 620,000 local rural workers had transferred from agriculture to the industrial and services sectors35.
Most effective of all, however, were institutional changes to the hukou system such as the 1984 relaxation of regulations that had prevented rural workers seeking employment with TVEs in nearby towns (Cai, Park, & Zhao, 2008). Hukou reform gradually smoothed China’s fragmented labor market. By 1987, Foshan’s migrant population had surpassed 150,000 and by 2012 it had exploded to about 3.7 million workers and their families – accounting for half the city’s total population. Foshan had made efforts to facilitate labor migration within the institutional guidelines established by the central government, but the limitations of that approach were apparent. Along with other local governments, it lobbied provincial authorities to appeal to Beijing to reform the hukou system. This eventually saw the introduction of incentives that resulted in greater flexibility in the country’s labor market. This process of local authorities responding to market realities by pushing for institutional change is typical of China’s reform-‐
driven growth model. In this case, authorities were unable to enact reforms locally, so they applied pressure upwards. Such lobbying for reform led to China gradually relaxing its centrally planned labor geography in favor of a market one. The efficiency of the labor market improved incrementally, but with dramatic results over time. The introduction of incentives could never occur evenly across the entire economy. The progress of some sectors and markets ahead of others created 35
NDRC Report (Unpublished), Employment Chapter, p8
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 102 tensions and pressures that motivated further marketization. One consequence of such uneven marketization will become apparent when we turn to discuss infrastructure development. Foreshadowing that result, we observe that a market-‐driven labor geography co-‐existing with a substantially planned infrastructure geography effectively guarantees some poor investments such as the creation of so-‐called ghost towns36. We will return to this issue in Chapter 7. 6.3.2
Reforming China’s labor market An efficient labor market needs free matching between employers and employees. Controls began loosening in 1980. First, the communist-‐era “job for life” guarantee, under which all employment was assigned, transitioned into a hybrid system, with government officials providing letters of recommendation. From this developed a budding labor market in which private labor-‐service companies emerged. Reforming China’s SOEs was a key aspect of the process. These reforms, which began in 1993, made labor-‐market efficiency a national priority. Not coincidentally, this was the same year the central government proposed the term “labor market” for the first time. SOE reform and the broader găizhì program saw almost 44 million workers laid off in China between 1995 and 2003 (Garnaut, Song, Tenev, & Yao, 2005). This massive unemployment led to such unrest that establishing a modern labor market became urgent. In Foshan, the problem was less serious because there were fewer SOEs. Nonetheless, all local governments were required to develop a strategy to deal with the challenge. A key element of Foshan’s plan was a framework for re-‐employment assistance. This scheme (zàijiùyè gōngchéng 再就业工程), launched in 1995, provided training, skills development, loan guarantees, incentives to start businesses and various social-‐security measures. It was a precursor to a broader employment-‐services program (jiùyè fúwù xìtŏng 就业服
务系统) formalized in 2000. The scheme included help with job postings, recruiting, document-‐filing and unemployment assistance that eventually became accessible online. In the context of an increasingly market-‐oriented labor geography, Foshan responded to the central government găizhì-related directives by improving its attractiveness as a place to live and work. This, in turn, gave it an edge over other cities competing for labor in the increasingly flexible market. 36
http://www.marketplace.org/sites/default/files/P1090793.jpg C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 103 Case study: Hukou reform The 2004 unification of Foshan’s different resident statuses replaced the practice of multiple types of hukou, such as urban or rural. This policy was embraced nationally by the State Council 10 years later (State Council, 2014). Before unification, spending on social welfare differed between urban and rural areas on the basis of their governments’ revenues. Given the lower revenue in rural areas, social-‐welfare services there were significantly lower. Other pioneering hukou reforms made it easier for migrants to claim local residency. In all, these reforms have made local social services increasingly accessible to rural residents and migrants, helping spread welfare benefits and broadly lifting living standards. Nevertheless, hukou reform may not be a high priority for a large number of Foshan’s migrants. Many apparently value access to social services over an urban hukou, despite the fact that the latter grants the former. An informal survey by Foshan’s mayor in 2013 found that, although migrants increasingly preferred living in cities, many would rather retain the benefits of their rural hukou, such as exemption from the one-‐child policy and the right to dividends from their family land. Of more concern than having an urban hukou was getting access education, healthcare and housing. As one migrant boldly put it: “We don’t care about a Foshan hukou, so long as we have education, medical services and other public services like the locals.” Indeed, the reality of migrant life in Foshan does not live up to the expectations of many. Wages are lower than those for locals – and lower even than what is available in other cities. Pay for Foshan’s migrants is broadly lagging GDP growth, with a survey in 2011 indicating that 50-‐60 percent of industrial workers planned to change jobs within a year due to low wages. As well, owning urban property is out of the reach of most migrants. Nonetheless, migrant workers enjoy better living conditions in Foshan than in their hometowns, as evidenced by the city’s stable population. However, the gap is closing. Foshan may be able to make up for this by expanding the quality and accessibility of its public services, although such a strategy will inevitably be constrained by government finances. 6.3.3
Labor-‐market regulation and dispute-‐resolution The massive increase in migrant workers in Foshan and the large number of SOE redundancies across China created impetus for improved labor regulations. Migrant workers are relatively easy to exploit through defaults on wages, forced overtime, poor working environments and other practices that exploit their weak position vis-‐à-‐vis employers. This is typical until an economy passes the Lewis Turning Point. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 104 Foshan’s various local governments have implemented a raft of provisions to improve labor conditions. In 2000, Nanhai launched a monitoring system to ensure employees were paid. In 2002, the municipal government enforced collective wage-‐bargaining between employers, employees and its labor department. Contract and dispute-‐arbitration laws have also been introduced, with provision for fast-‐track arbitration and litigation for labor-‐related disputes. While Foshan had to respond to labor disputes as they arose, the central government took longer to adopt national action. Laws governing disputes were enacted in 1987, requiring consultation, mediation, arbitration and judgment by courts. However, this applied only to SOE employment until 1993, when it was expanded to cover all enterprises. It was not until 2008 that the Standing Committee of the NPC enacted the Employment Disputes Law (2008). This created two avenues for resolution: claims brought on the basis of alleged violation of rights; and independent action by the Ministry of Labor and Social Security (Lauffs, 2008). Case study: The 2010 Nanhai district Toyota strike In May 2010, workers at Toyota’s plants in Nanhai district went on strike, demanding higher salaries and benefits. The strike involved some 1,900 employees and was reportedly non-‐violent, with workers gathering at the canteens or gates of facilities and marching within the factories. The strike attracted considerable attention and took two weeks to be resolved. Toyota agreed to raise monthly salaries by RMB500 – a significant amount, considering that the minimum wage in Foshan had been raised two months earlier to RMB920 per month (Zhag, 2010). The strike triggered similar action throughout the Pearl River Delta’s auto industry. Resolution of these incidents established a functional process for dispute-‐resolution involving workers, employers and the local government. 6.4
ATTRACTING A ND R ETAINING T ALENT The creation of a market-‐driven labor geography means that the living environment has become an important factor in Chinese workers’ decisions about where to live, work and raise their families. Availability of work and competitive salaries remain critical, but social benefits, infrastructure, culture, the environment and social services are increasing priorities. Foshan’s population growth has increased the demand for housing, education, social services and a livable environment relatively free of pollution. Figure 6.2 depicts the household within society. It highlights some critical services people need for a quality urban lifestyle, as well as some of the functions of government and the economy required to provide those services. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 105 Figure 6.2 | Families’ demand for services and lifestyle Source: FGI analysis Social services are an important factor in attracting skilled people to a city and retaining them. The government plays a central role in this. When the market determines labor geography, different regions can compete to provide social services to entice the workers needed to support the local economy. Given the kuàikuài competition in China, this is precisely the outcome. The central government regulates social services through three primary channels: financial control; policy and planning; and the hukou system. Financially, Beijing determines the distribution of revenue and expenditure, including healthcare, pensions, education and public housing. Tax reforms discussed in section 8.4.1 and elsewhere shifted a heavy burden of expenditure to local governments (including Foshan’s five districts) without transferring equivalent revenue. In terms of policy, the central government directs social services through administrative orders and national-‐policy reforms. 6.4.1
Healthcare Foshan has seen substantial growth in community and village-‐level medical stations and clinics to provide affordable and convenient healthcare. Most of the city’s medical institutions are public. Funding comes from municipal and lower-‐level governments. The provision of healthcare is one way by which C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 106 cities differentiate can themselves as they compete under the direction of the central government. Two national reforms changed the course of China’s healthcare system. The first healthcare reform, in the wake of Deng’s 1992 southern tour, resulted in a wave of privatizations throughout the sector37. Between 1993 and 2004, for example, the Sanshui district privatized 10 of its 11 public-‐health centers, adopting a system of “paying hospital expenditures with medicine revenue” (yi yao yang yi 以药养医) that incentivized profit-‐generation. This reduced fiscal burdens and mobilized private capital to fund hospital modernization. The second healthcare reform, following the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, was in response to shortcomings in the central government’s handling of the crisis. These post-‐SARS reforms emphasized broad, equitable basic healthcare. National policy shifted towards making medical institutions public again and opening low-‐cost, walk-‐in community clinics. SARS proved to be a turning point for China and, once again, Foshan was in the vanguard of reform. It was the first city to identify a case of the virus. Subsequently, four of the first victim’s family were found to be infected and all five were quarantined in a local intensive-‐care unit. Within two months, all had recovered and were discharged. Local medical facilities, stringent quarantine, the local government’s rapid response and vigilant medical staff were among the reasons the outbreak was contained in Foshan so quickly. This was in contrast to what occurred in other areas, such as neighboring Guangzhou, which suffered more widespread outbreaks. Two major problems addressed by the second reform were a lack of basic healthcare, particularly in rural areas, and of a comprehensive emergency-‐
response system. A less urgent but important issue was a lack of health insurance, particularly for migrant and rural populations. As part of the response, the number of predominantly private township clinics in Foshan decreased from 56 in 2003 to 20 by 2012, while the number of public ones expanded more than tenfold from 31 to 350. As well, 176 public clinics were built in villages. In 2004, the city also established a publicly funded rural health-‐insurance scheme (Nóngcūn jūmín yīliáo bǎoxiǎn 农村居民医疗保险). Four years later, the rural and urban healthcare systems were combined. Although these reforms represent Foshan’s response to a central government directive, the way it implemented them helped increase its competitive edge. 37
关于深化卫生医疗体制改革的几点意见
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 107 6.4.2
Environment Extensive industrialization has brought severe problems. Air, soil and water pollution are significant health hazards. In the context of competition for workers, the environment has become a key means by which cities seek to differentiate themselves in the competition to attract and retain skilled workers. As people’s incomes rise, they are better able to decide where to live. In recent years, Foshan’s air quality has been notoriously the worst in the Pearl River Delta. Water pollution is also a major risk. Local agriculture has been hard hit because people refuse to buy food grown in a polluted environment. Those who can afford to might import food and install air and water purifiers. However, such measures increase the cost of living and dramatically reduce the quality of life. It is no surprise that people who are more skilled or wealthy tend to relocate. Foshan has taken some steps to combat environmental pollution and energy inefficiency. In 2007, it penalized the local ceramics industry into cutting pollution, although at great cost since most manufacturers have now relocated to less vigilant or restrictive cities. Disappointingly, Foshan’s cleanup has been neither comprehensive nor equitable, according to anecdotal evidence. Efficient controls, including standards and dispute-‐resolution, have yet to be established. 6.4.3
Housing Foshan’s private housing market took off after 1998, when the central government replaced welfare-‐oriented distribution with housing monetization. The resulting explosion of real-‐estate development across the city has continued on the back of urbanization. Accompanied by rising wages, this has lifted living standards visibly. Foshan’s per capita housing area increased from 27.3 square meters in 2002 to 38.8 square meters in 2012. Meanwhile, housing prices have also increased rapidly, driven by land revaluation, inelastic demand for modern housing, improved infrastructure and Foshan’s proximity to Guangzhou. Although many local residents have benefited from rising property values, others have been left out of the market. These include local low-‐income residents and migrants, particularly younger workers. The average monthly disposable income of the bottom 10 percent of people in 2010 was RMB937. In 2012, the average rural migrant worker’s monthly salary was between RMB2,000-‐3,000, while the average property price exceeded RMB7,635/m2. Such a worker would need to save for more than 20 years to purchase an apartment of 50 square meters. Understandably in such circumstances, demand for public housing remains substantial. As migrants continued to move to Foshan in large numbers, the authorities pursued several strategies to increase the housing supply. The most common C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 108 was tolerating an informal rental market, mostly in so-‐called urban villages. Many local residents who owned small plots of land in such villages built houses that they then leased to any number of migrant workers. Many enterprises in Foshan also provided employees with affordable dormitories, primarily for single workers, as part of remuneration packages to retain workers. In recent years, many urban villages have been redeveloped as private housing. Simultaneously, more migrants have begun establishing families in Foshan. Consequently, the demand for apartments has been rising. The RMB4 trillion stimulus program of 2008 included RMB90 billion for affordable housing. Beijing allocated construction quotas to provinces for reallocation to cities and counties. From 2011 to 2012, Foshan completed the construction of 6,100 affordable-‐housing units as part of a program intended eventually to deliver almost 33,000. However, most of those built so far have been allocated to local low-‐income residents, rather than migrants. As well, distribution and construction problems have plagued the program. Regional and local quotas were not allocated according to local needs or demand. Mandatory or voluntary deadlines encouraged shortcuts in planning, financing and supporting infrastructure. Nanhai district provides a pertinent example of poor planning and wasted resources. In August 2013, only 38 percent of its low-‐income housing was occupied – far below the target, which itself was a relatively low 60 percent. Demand for such housing simply did not meet the supply created during the construction splurge triggered by the fiscal stimulus. Time and funding issues meant these projects, typically in remote areas, had no access to existing infrastructure. The financial burden of such wasteful construction contributed to local governments’ increasing dependence on land sales as a source of revenue. Responding to these problems, Foshan subsequently halted construction of affordable housing and took steps to ensure that further development was in response to real demand. As well, other measures were adopted to improve housing access for migrants. 6.4.4
Pensions China has a rapidly aging population and Foshan’s is aging faster than average. According to the 2010 census, 15 percent of residents with a local hukou were 60 years old or above – two percent higher than the national average. An aging population increases demand for a variety of public services, especially healthcare (already discussed) and pensions. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 109 Foshan’s development of a pension system closely followed national reforms beginning in 198438. It is strongly influenced by national fiscal policies. Originally centrally planned, the system was gradually reformed into a local hybrid pension collection and imbursement apparatus. Foshan’s pension system has undergone three major changes. The first was decentralization, with financial responsibility being transferred from the central to local governments. In turn, they shifted portions of the financing burden onto employers and employees. Before 1978, there were no private employers. State enterprises provided pensions for their employees, but there was no provision for rural residents. The end of the Cultural Revolution brought millions of “educated youth” (知识青年) from the countryside back into cities. This influx increased the cities’ employment burden. One response was to allow employees of public enterprises and SOEs to retire voluntarily and have a child take their jobs. This further increased pension burdens to such an extent that from 1978 to 1984, domestic expenditure on SOE pensions rose fivefold and that for collective-‐owned enterprises by a factor of 20. In Foshan, the retired population doubled between 1978 and 1983. A combination of economic liberalization and decentralization of financial responsibility to local governments motivated gradual pension-‐system reforms. As a first step, in 1984 Foshan pooled pension-‐relevant funding from individual employers to reduce the long-‐term burden. A social-‐services insurance-‐
management institution was established for this purpose. In 1988, coverage expanded to the municipal government. This policy increased the system’s stability by transferring Foshan’s pension system from intragenerational balancing to intergenerational, with incremental surplus. A second step was the creation of a multi-‐source pensions-‐collection system. In 1990, Foshan required employees to also contribute to their pension schemes, along with their employers and the government, at a rate of 2 percent of their monthly salaries. This multi-‐source pension-‐collection policy was adopted nationally in 1991. It further reduces the economic burden on enterprises and governments, adding to system stability. Aspects of Foshan’s policy, and those of other pioneer cities, were included in the national scheme, with multi-‐source pension-‐collection becoming standard in 1993. Pension coverage and quality have been the main focus for Foshan and the country as a whole since 2004. The aim has been to expand coverage to vulnerable sections of the population, including rural and migrant workers. 38
1984 年，国有企业退休费用全社会统筹在辽宁、广东、江苏和四川展开试点
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 110 Foshan’s hukou unification preceded these policies for incorporating rural populations into the pension system. In 2009, a rural pension system extended the same basic benefits available to urban residents in exchange for monthly payments. These policies particularly helped rural residents whose land had been taken for development. From 2012, personal pension payments and imbursement could be transferred between provinces. However, the migrant population has been insufficiently covered and some profound obstacles remain. 6.5
CONCLUSION Two major forces drove the development of Foshan’s social services: economic liberalization; and changing demographics. The city’s social-‐services provision benefited tremendously from economic growth that brought wealth for public investment, as well as from the demographic dividend of a relatively large working population. Yet social services are substantially influenced by the central government through fiscal arrangements and policy shifts. Given intense competition between cities to attract workers, the high share of migrants in Foshan offers some evidence that it has been relatively successful. However, many challenges remain, including some that are urgent. Many low-‐
skilled workers are struggling to find jobs, while there is a dearth of skilled workers to meet new employment demand. Meanwhile, social services are not broadly available to the migrant population. Foshan has made great strides in becoming a better place for people, but the capacity of municipal governments is limited by tiáo-‐kuài relations. Five channels are most important in this respect: central planning; policy; ministry regulation; personnel assignment; and tax revenue. Central-‐local fiscal arrangements and policy reforms influenced Foshan’s financial capacity to provide social services. The 2003 healthcare reforms forced many local governments to buy back previously privatized hospitals, along with their debt. Pension reform pushed expenditure responsibilities onto local governments out of proportion to their revenue capabilities. Affordable-‐housing policies imposed excessive timeframes without sufficient financial support. Navigating the central-‐local contradictions is a major hurdle for ongoing improvement in the living environment for China’s cities, including Foshan.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 111 7 I N F R A S T R U C T U R E The provision of infrastructure has played a huge role in China’s economic development over the past 35 years. However, it is also a cause of many of the problems the country faces today. The story of infrastructure in China is not simply one of more roads, rail, airports, pollution and debt. Its financing, construction and management are central to the nation’s transition from a socialist state to a market economy. Infrastructure is normally thought of as a mixed good, having features of both private and public goods. It is substantially non-‐rivalrous and non-‐excludable but still responsive to market mechanisms. However this concept did not exist in China before the reform period. Previously, infrastructure was entirely funded, built and managed by the government through central SOEs. The main reform driver was the huge increase in demand that came with China’s opening to the global market and rapid economic growth. Demand simply outstripped the capacity of the old economic model to respond. Meeting the new and growing demand for infrastructure required a different approach. This chapter explains how and why the financing, construction and management of infrastructure evolved in China. Examples involve discussions of several key Foshan projects that were in the vanguard of institutional development. We also examine the impact of infrastructure on Foshan’s development and highlight economic, social and environmental problems. 7.1
DEMAND FOR INFRASTRUCTURE Infrastructure is a critical element in economic and social development. Throughout this report, we have noted the interdependence of markets and infrastructure is a ubiquitous factor in production. It is crucial for the development of intermediate and final goods. It also enables a city to attract investment and skilled people seeking better living and working environments. Infrastructure requires land, finance and intermediate goods for production, creating derived demand from those inputs. The massive expansion of industry following China’s “reform and opening” (discussed in Chapter 4) created demand for far more infrastructure, necessitating substantial investment. When Guangdong and Fujian began export-‐
oriented growth, the demand exploded well beyond the provinces’ financing capacity. This was true also for Foshan, given its early success in expanding its industrial base. Such growth requires major investment, especially in transport (initially roads and, later, railways). As well, water supply is a critical factor and substantial improvements to Foshan’s electricity infrastructure were urgently needed. Still today, further significant upgrading is required. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 112 As development proceeds, households also begin demanding more modern and convenient infrastructure. During early stages, they can typically be served by the same infrastructure required by industry. However, as people become richer, they push for improvements such as convenience and comfort. Thus, demand increases in both absolute terms and relative to industry. Foshan is now at that stage. 7.2
TIAO-‐KUAI D YNAMICS: INFRASTRUCTURE D EMAND O UTSTRIPS CAPACITY The changing relationship between the central (tiáotiáo) and local (kuàikuài) governments is at the heart of how infrastructure is financed, built and managed in China. The most important force for change is fiscal. Before the start of the reform era in 1978, all infrastructure projects were financed and administered by the central government through SOEs. These acted under the direction of or in partnership with central ministries. When China opened to international markets, demand for infrastructure exploded at the local level. Thus, it was local governments that were forced to respond to this demand. City authorities faced an acute need for greater investment in infrastructure. Without it, they could not encourage the export-‐
oriented industrial base needed to fuel economic growth and, thus, ultimately win promotion. Their only recourse was to lobby Beijing via their provincial governments for greater spending commitment. The central government’s response was accommodating but not supportive. It relinquished its monopoly on infrastructure, but placed part of the financial burden on local governments, especially for local projects. Before the introduction of LGFPs, private investment was the only option available to local authorities for raising the necessary finance. The evolution of institutions progressed mainly through individual projects initiated and supported by local governments dealing with their own challenges. Much of this chapter explores that institutional evolution through infrastructure-‐
project case studies. 7.2.1
Transport projects and institutional development Transport was a key early focus of major infrastructure investment in Foshan and elsewhere across China. Changes in the funding, construction and management of these projects during the reform era is a case study in itself of the country’s institutional evolution from central planning to a market economy. Although gradual and sporadic, for the most part, reform has generally been consistently in pursuit of a market-‐oriented economy. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 113 Foshan’s initial transport-‐infrastructure focus has shifted over time (see Appendix B) from water-‐based to road and then to rail in response to the needs of an increasingly populous and modern economy. Foshan’s road network tripled in length from 1,600km in the 1970s to almost 5,000km by 2010. The number of vehicles grew at a similar pace. The total distances travelled increased almost fourfold from 2.5 billion passenger-‐kilometers in 2000 to 8.6 billion in 2010. Meanwhile, total freight-‐ton-‐kilometers rose from 90 billion to 153 billion. Case study: Sanmao Rail Sanmao Rail was China’s first rail project jointly funded by both central-‐ and local-‐government as well as the private sector. The 357-‐kilometer Sanmao line links Foshan’s Sanshui district with Maoming city in southwest Guangdong. Construction had begun back in 1958, but the project underwent several reorganizations before its completion in 1991. Under the planned economy, railways were constructed and owned by the central government and/or SOEs. Private capital investment was forbidden. Despite the central control, infrastructure construction was poorly coordinated, with frequent overlaps between government and SOEs. In Sanmao’s case, insufficient funds led to a 16-‐
year halt in construction in 1961. Restarting such projects required a major innovation in the form of a precursor to the now-‐ubiquitous LGFV. In 1987, the Ministry of Railways and Guangdong provincial government formed an unlimited liability enterprise known as the Guangdong Sanmao Railway Company. This was a legally independent entity, although ill-‐defined ownership rights left its governance structure unclear. Management was overseen by a roundabout system of nominations and appointments between central and local governments. Ultimately, government retained control, weakening the entity’s envisaged independence. In 1996, the company was reclassified as a limited-‐liability company. Ownership was split between the central and local governments, as well as domestic and foreign private-‐sector firms. Internal reform helped define the responsibilities of the public and private owners. As well, standard shareholding-‐company working practices were implemented. In 1996, following further institutional reform, it became a shareholding company, Guangdong Sanmao Railway Inc Ltd, with RMB800 million registered capital. The Guangdong provincial government held 41.25 percent; the railway ministry had 33.75 percent; Japanese company Sanfu Investment Co Ltd (a subsidiary of Nomura Securities) was allocated 20 percent; and the rest was held by a number of other firms. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 114 The project helped pioneer many of China’s infrastructure-‐financing reforms. Bringing a corporate structure – in effect, the very essence of a market economy – into a major public-‐works project was a milestone and helped launch the country’s transition to a market economy. Foshan implemented such reforms independently, imitating what had been learnt from places such as Hong Kong. The success of the project after years of dithering and delays ensured it soon became a much-‐imitated model for effectively and efficiently organising public-‐
infrastructure projects. Case Study: The Foshan Bridge The Foshan Bridge was the first toll bridge: a commercially financed project39 for which the loan would be repaid by revenue raised from tolls. Now more common, such a strategy is known as “loan to build roads, toll to repay loans” (Dàikuǎn xiū lù, shōufèi hái dài 贷款修路，收费还贷). Previously, road and bridge construction was financed from a centrally managed fund derived from vehicle licences and other fees. Without capital-‐market access, chronic shortages of funds hindered transport-‐infrastructure development. The loan-‐and-‐toll method was tested in Guangdong, with projects permitted to borrow from investment companies, private capital, foreign capital and investment trusts. The experiment received widespread attention and the State Council finally adopted the strategy in 1984, the year the Foshan Bridge was completed. Although the loans-‐and-‐tolls approach was used to initially fund the project, alternative sources were eventually required. When Foshan expanded to incorporate Gaoming in 2002, the city’s 40 toll stations hindered travel and became an obstacle to amalgamation. As a result, the number of stations was cut to 14 and an annual levy on local residents’ vehicles was introduced to cover maintenance costs. Case study: The Foshan 1st Ring Road (2006) Linking Chancheng, Nanhai, Shunde and Sanshui, the Foshan 1st Ring Road is the longest such highway in Guangdong province. Its 100-‐kilometer circumference is on par with Beijing’s 5th Ring Road. The project was one of the first that did not rely fully on the central government. It pioneered a new model of development that reallocated responsibilities and separated enterprise from administration. The Foshan Road & Bridge Construction Co, a so-‐called special-‐purpose vehicle 39
The Foshan Trust Investment Company, established by the city government in 1984, accepted funds directly from the public, amounting to RMB26 million.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 115 (SPV), was created to manage, plan and finance the project, as well as build and ultimately operate the ring road. A new oversight agency was created, comprising Foshan’s deputy mayor, the chief of its transportation bureau and the chief secretary of the party committee of the bureau. The agency ensured the project conformed with city, provincial and national plans. External consultants were also engaged, primarily for advice40. This was an early version of the LGFP model, which is now ubiquitous in infrastructure projects and widely blamed for contributing to the problem of local-‐government debt. It enabled local governments to adopt a modern corporate structure, outsourcing work but retaining overall control of a project. In 2006, the use of such a structure was a crucial reform because it separated a project’s assets and liabilities from the local-‐government budget. It also allowed easier monitoring of financing and debt and simplified relationships between local authorities and contractors. However, the enormous local-‐government debt accrued through LGFPs since 2008 has raised serious, unresolved concerns. The Foshan Road & Bridge Construction Co borrowed RMB15 billion (65 percent of the total construction capital required) from more than 10 banks and hired consultants and contractors41. Access to financial markets and market capital allowed the company to plan and build the ring road in just three years. Using an LGFP reallocates responsibilities. It legally separates the corporation from government administration, helps clarify roles, mandates commercial participation (private or state) and limits political influence. Case study: Guangfo City Guangfo (for Guangzhou and Foshan) is a major regional integration project. It aims to integrate Guangzhou’s services economy with Foshan’s industrial economy to create a regional powerhouse. The aim is that the resulting metropolitan area will accelerate industrial upgrading and economic restructuring, as mandated by the central government. Then-‐Guangdong party secretary and now Vice Premier Wang Yang was a key instigator of the massive planned integration of the Pearl River Delta region (Yu, 2012). Beijing approved the Guangzhou-‐Foshan Urban Integration Plan in 2009, directing the Guangzhou and Foshan city governments to begin working legal and regulatory requirements of the multi-‐city integration (GDRC, 2009). 40
This is sometimes called the headquarters-‐person-‐consultation (HPC) model, with the headquarters being the government overseer, the person being a corporation (“legal person”) responsible for implementation, and the consultation being third parties providing advice. 41
Wang Mengjun Ed, 大型基础设施建设项目管理模式与目标控制体系-佛山一环工程管理探索与实践, Beijing – China Building Industry Press (2010)
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 116 It is the region’s first experiment at integrating two municipalities. Well-‐
functioning institutions will be critical for such a vast metropolis and these have been identified as the biggest challenge. Popular support will be critical also. Consequently, before either municipal government makes regulations that may affect the other, it is expected to not only consult the other government but also seek input from “grass-‐roots government organizations, residents and … social organizations” (Guangzhou Municipality, 2011). Initiatives involving different levels of government and the private sector have already been implemented or planned as part of the integration. Among these is Guangfo Metro, the country’s first intercity subway. Line 1, which opened in 2010, reduced travel time between the two cities to 39 minutes. Two other lines are under construction, with completion dates of 2015 and 2020. Line 1 carried some 127 million passengers during the three years to October 2013. The daily flows increased by 10 percent each year, averaging 133,000 passengers per day in 2013 – although on its busiest day that year Line 1 moved twice that number (Zou, 2013). The Guangfo project presents a new challenge for China’s development model. As well as the traditional kuaikuai competition, it requires kuaikuai cooperation. The broader aim is to compete more effectively at a regional, rather than city, level. The Guangdong provincial government is facilitating this cooperation to achieve the greater economies of scale offered by a single market. This would make the region more attractive to global investors. Strategies based on cooperation and competition between local governments will require further evolution of China’s growth model. 7.2.2
Energy Although energy is a crucial factor of production, the sector continues to be over-‐
regulated, in the same way as other key elements such as land, labor and finance. This causes serious problems for China. Among the reasons given for the failure to deregulate the sector are concerns about the social impact of fluctuating prices and resistance from powerful vested interests. (It is unclear how much power the so-‐called petroleum clique retains, given that it has been a focus of the ongoing anti-‐corruption campaign.) Five SOEs dominate power generation. Transmission and distribution are administrative monopolies. (China Southern Power Grid handles Foshan’s electricity). Regulatory decentralization in the mid-‐2000s led to the establishment of smaller power plants capitalized by locally administered SOEs, private companies and foreign firms. In Foshan, power generation expanded rapidly from the 1980s, but collapsed in the mid-‐2000s (see Figure 7.1). Foshan has little access to primary energy C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 117 sources and is not authorized to import primary energy. Such imports can be done only by the central government. Consequently, Foshan has increasingly relied on electricity from other parts of Guangdong, especially for industry, as demand races ahead. On top of insufficient primary energy, infrastructure is being “hollowed out”, threatening local energy security. Despite increased consumption and an economic base dominated by industry, power use per unit of GDP is lower than the provincial average and well below other industrial cities such as Dongguan. MWh Figure 7.1 | Electricity generation in Foshan (1978-‐2011) 1,600 1,400 1,200 1,000 800 600 400 2011 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 1978 200 Source: NDRC (2013) （MWh / million RMB） Figure 7.2 | Electricity consumption by city and province (2005-‐2010) 1.8 1.6 1.4 Provincial level 1.2 Foshan Dongguan 1.0 Guangzhou 0.8 Shenzhen 0.6 0.4 2005 2006 2007 2008 2009 2010 Source: China statistical yearbooks (2006-‐2011) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 118 The evolution of Foshan’s electricity infrastructure can be seen through a series of three electricity shortages that spurred reforms at both central and local levels. After the first two, local authorities responded to national policy by deregulating and strengthening the market. However, the third, ongoing shortage has different causes that will require novel responses. The 1978-‐96 electricity shortages With China’s “opening and reform”, industrial output surged in Foshan (as discussed in Chapter 4) This generated a demand for energy that far outstripped the resources of the central government, which was responsible for all such investment. In Foshan, where some manufacturing industries specialised in energy-‐intensive products such as ceramics, the discrepancy was even more severe than in the rest of China. The provincial grid, suffering from under-‐
investment, could meet only about half of the city’s demand. Beijing responded to pressure from local and provincial governments by relaxing some elements of the energy sector’s regulations. This allowed local authorities to enter the market and encouraged joint financing by local governments and SOEs of projects to expand capacity. Meanwhile, the Guangdong provincial government established guidelines to encourage foreign investment. From 1987 to 1995, following the entry of private and local-‐government capital, electricity investment in Guangdong exceeded that of all other provinces. Foshan began diversifying its generation capabilities, establishing city-‐level plants under a variety of ownership types and, thus, ending the shortage. The immediate supply crisis was resolved through institutional reform, which enabled higher levels of investment from more diversified sector sources. The 2003-‐2006 electricity shortages By 2003, Foshan was again suffering shortages, this time due to a decline in supply. Demand fell sharply after the 1997 Asian financial crisis, leaving many generating plants idle. In 1998, the central government overreacted by declaring a three-‐year moratorium on construction of new plants. At the same time, it encouraged the retirement of less efficient, older generators. However, new plants took at least two years to build. This all meant that when energy demand picked up again, supply was slow to meet it. On joining the WTO in December 2001, Beijing implemented a package of reforms that led to a significant relocation of global production to China. Part of that involved major investment in manufacturing capacity, which is typically a highly energy-‐intensive process. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 119 Again, the central government overreacted. It tried to solve the problem by lowering standards for construction, emissions and safety to facilitate market entry. It also approved construction of many low-‐capacity substandard plants (Wéiguī jīzǔ 违规机组). These plants contributed an additional 60 million kW to national capacity, or one-‐sixth of total additional capacity, between 2002 and 2007. In Guangdong, substandard plants increased capacity from 36 million kW to 59 million kW over the same five-‐year period. Beijing also implemented rules separating the administration of generation plants and power grids. These led to the creation of the Southern Power Grid, along with greater competition in the sector42. At the city level, Foshan separated the supervisory and business roles in generation. It delegated supervision to the local Economic and Trade Bureau and the business role to the new Foshan Electricity Supply Bureau. Greater cooperation between administration and enterprises led to a so-‐called green channel, which expedited and streamlined regulations for grid-‐infrastructure projects. The second shortage resulted from problems in the tiáo-‐kuài relationship, with the central government using macro policy to address structural problems. In 1998, it had stopped investment in electricity capacity because of a major external demand shock that left resources idle. When the external situation improved, macro policy was not nimble enough to respond quickly, creating a shortage that started in 2003. Worse, the eventual response was inappropriate. Although it reduced the shortage, it created other problems, mainly environmental and safety issues. As central government macro policies are normally applied nationally, there may be many unintended consequences in some areas, particularly given country’s diversity. This inefficient result of tiáo-‐kuài relationships occurs in many areas of China’s economy. The post-‐2008 electricity shortages The current energy shortages, which began in 2008, were caused by distortions in electricity prices due to central government price-‐setting. To provide consumers with affordable electricity, Beijing set prices artificially low – below the cost of generation and distribution. The 2008 financial stimulus (an example of the central government using infrastructure investment as a counter-‐cyclical fiscal tool) caused a jump in power demand that only gradually tempered. Cooperation between local government and non-‐government generation plants resulted in more efficient 42
电力体制改革方案（国办发［２００２］５号文件
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 120 supply at larger scales. However, further efficiency is hampered by the central government’s distortion of prices. Coal-‐price distortions cause many problems in China’s energy market that have proved difficult to resolve. Local and international markets determine coal prices, while the government sets those for electricity. This prevents the price volatility of coal flowing through to consumers. While the prices electricity producers charge consumers are fixed, their costs can be highly volatile. Before coal prices slumped globally, the significant gap between the price of coal used in electricity generation and the centrally controlled price for electricity obscured the true costs of power generation. In 2009, Foshan consumers paid a flat rate of RMB0.59/kWh43, while average production costs were RMB0.80/kWh. The effects of this distortion are significant. Prices do not take into account social and environmental costs and low prices encourage excessive consumption. In addition, given high demand and low supply, both the coal industry and grid owners have achieved significant market power. The coal industry has capitalized on high prices and grid owners on their control of electricity supply. Many generators ceased production because of this situation. Shortages and policy inconsistencies have been exacerbated by the national reintroduction of plant standards (shàngdà yāxiăo 上大压小). This has resulted in higher environmental and safety costs and the closure of many substandard plants. It also hugely reduced Foshan’s total electricity capacity in 2007. This is another example of contradictions between tiáo and kuài, in which centralized institutions or directives can be inadvertently incompatible with local conditions. Case study: First Auto Works-‐Volkswagen (2012) Foshan’s electricity infrastructure was critical to the decision by First Auto Works-‐Volkswagen to open a joint plant in the city. Evaluation of its expected power demand began in 2010, soon after the Electricity Supply Bureau discovered the investment potential of the joint venture. The evaluation results called for the installation of new electricity infrastructure. The bureau immediately proposed a scheme and completed construction of a substation within seven months – less than half the normal time. The efficient implementation of electricity infrastructure and the bureau’s cooperative attitude were crucial in securing FAW-‐Volkswagen’s RMB13.3 43
Guangdong High Tech Service Zone for Financial Institutions, http://www.f-‐hitech.com/eng/
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 121 billion (USD1.96 billion) investment. FAW-‐Volkswagen opened its first South China vehicle production plant in 2012 on a 100-‐hectare site in Nanhai. The plant, with a reported initial capacity of 300,000 vehicles, began producing Volkswagen and Audi A-‐class models in 2013. The expected annual output value is RMB40 billion (USD5.89 billion). The plant will directly employ about 4,000 people in 2013 and create 50,000 related jobs (Xiao Z. , 2011). The experience of FAW-‐Volkswagen demonstrates how Foshan and other local governments compete for FDI. In this case, it provided dedicated infrastructure, as well as access to and assurances from officials in charge of local electricity infrastructure. This was seen as critical to the project’s being economical. This type of competition between cities for projects is a response to incentives offered to local officials that the central government uses to steer China’s local growth engines. It is distinct from similar efforts in countries such as the USA because of the different metrics used in China and because of the different tools its local officials can mobilize to attract projects. 7.3
INSTITUTIONAL D EVELOPMENT: M ARKET V S R ENT-‐SEEKING RESPONSES Institutional evolution has been central to infrastructure development in China. One factor yet to be addressed is how to minimize rent-‐seeking to ensure proper market outcomes. Foshan has benefited from its relative lack of major SOEs. This has enabled it to implement a public tendering process for major projects. This is standard in many OECD countries, but novel within China, where SOEs still expect a central role in many projects. Since 2005, Foshan has held public bidding for more than 500 projects, such as the construction of power, water and landfill-‐incineration plants. Two-‐thirds of these were awarded to private enterprises, with a total value of more than RMB200 billion. In the past, these projects would have been owned and controlled by the government or SOEs. This process is a clear example of tiáo-‐kuài facilitating bottom-‐up reforms that align to central-‐government objectives. For Foshan’s officials, the decision to open the tender process was a safe reform almost guaranteed to be rewarded because it was endorsed by the central government. The city’s mayor, Liu Yuelun, indicated during an interview that, although the decision put Foshan ahead of national practice, it was still clearly in keeping with the direction the central government wanted to pursue (Liu, 2013). Political opposition made it initially difficult to adapt the approach nationally. Approval for a local initiative is relatively simple. Ultimately, the 2013 Third Plenum vindicated Liu’s judgment. Once again, this shows how China’s guided C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 122 experimental policy-‐reform process works. Liu was promoted to party secretary of Foshan in 2014. 7.4
ECONOMIC A ND SOCIAL IMPACTS The above discussion has focused primarily on motivations for bringing about reform in institutions that invest in, construct, operate, manage and govern infrastructure in China, using examples from Foshan. A fuller view of development must include the economic, social and environmental impact of infrastructure, as well as how it is provided. 7.4.1
Local-‐government debt There are many dimensions even within the economic impacts of infrastructure. We have discussed its role as a critical factor in production and its social benefits. We have also examined the evolution of financing mechanisms and the establishment of LGFPs. Now, we consider the impact of infrastructure investment on the sustainability of local finances. China’s fiscal decentralization is unbalanced. This is a problem originating from a lack of revenue needed as China’s reforms were implemented. This problem was exacerbated in 1994 when concerns about fiscal revenue’s falling share as a percentage of GDP prompted Beijing to centralize tax receipts (discussed in Chapter 8). The mismatch of responsibility for local expenditure and fiscal revenue left many cities with serious debt. For Foshan, debt from LGFPs and other sources was estimated at about RMB140 billion, surpassing the RMB90 billion in 2012 (Southern Metropolis Daily, 2013). A high portion of debt financing is used for infrastructure investment, meaning that it is intimately linked to China’s local-‐government debt problems. The extent of this debt in Foshan and nationally is discussed in more detail in Chapter 8. Case study: Guangfo metro Operating costs of the Guangfo metro during its first year were about RMB320 million, while fare revenue was RMB110million, resulting in RMB210 million of operational losses. Foshan was required to pay 49 percent and Guangzhou the rest. Thus, Foshan spent about RMB100 million to run the metro in 2010 (Zou, 2013). Debt-‐financed rail projects are common, but not ubiquitous, in China. Among the examples from which the Guangfo line could learn is the Hong Kong Mass Transit C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 123 Railway (MTR Corporation)44. It is said to be the most profitable such system in the world. In 2013, the MTR had an operating profit of HKD16.3 billion (MTR, 2013). Its investments are designed to deliver value to other development projects, which can recover costs associated with infrastructure construction. The mass-‐transit arm functions as part of a vertically integrated business that includes offices, malls and residential properties near and inside MTR stations. A portion of profits are used for subsequent investments and upgrades to stations. The MTR operates without incurring public debt because its business model generates demand for its own investments by creating public infrastructure. Property prices along the Guangfo line have risen by 5-‐10 percent each year since it opened, implying that the MTR approach to infrastructure development may be feasible for Foshan. Indeed, the Dongping transit hub at the center of Foshan’s Sino-‐German industrial services zone was built using the MTR model, with developers covering the costs of building public-‐transit facilities. 7.4.2
Rent-‐seeking Local governments in China can be seen as both providers of public services and corporate entities managing assets and debt. If the boundary between these functions is poorly defined, enterprise may mix with public-‐interest obligations. This can create grey areas where corruption flourishes. Such opportunities are compounded by the complexity of tiáo-‐kuài relations, creating fragmented power, overlapping bureaucracies and territorial blocks. The media publicized numerous high-‐profile corruption cases in Foshan during 2013. In one case, 30 government officials were arrested for corruption over the construction of a 24-‐kilometer section of highway in Gaoming district. As Caijing Magazine pointed out, this amounted to more than one corrupt official for each kilometer of road (Yancheng Evening News, 2013). In a separate case, the deputy secretary of Foshan’s Bureau of Public Security and more than 50 vehicle inspectors were detained for overcharging registration fees (Southern Metropolis Daily, 2013). Corruption undermines resources-‐allocation and erodes social and market confidence. The party has led a high-‐profile campaign against corruption since the 18th National Party Congress but institutional reform is essential for deterring serious corruption in infrastructure investment. 44
MTR is a Hong Kong-‐listed public company in which the government has a 75 percent stake.
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 124 7.5
ENVIRONMENTAL IMPACTS Foshan is one of the most polluted cities in the Pearl River Delta, recording the region’s worst air pollution in 201245. This threatens public health and contributes to greenhouse-‐gas (GHG) emissions, which China is working to contain (Lin, Chan, Chan, Wang, & Dong, 2011). With the 11th Five-‐Year Plan, the central government began to move away from basic GDP figures as the sole developmental indicators. This was reinforced in the 12th Five-‐Year Plan, which increased the emphasis on environmental safeguards. For example, four of five listed environmental targets are binding. However, tiáo-‐kuài dynamics mean that implementation has lagged because local officials needed be convinced of the commitment to these changes by the higher authorities. GDP growth had been the key metric in evaluating local performance and promotions for so long that changing the system required courage and/or very clear signals. The signals have now been made clear. This can be seen in the list of weighted performance measures for Foshan local officials presented in Table 3.4 and is supported by conversations with even junior officials who see successful environmental projects as important in securing promotions. 7.5.1
Transportation infrastructure and the environment As China continues to grow rapidly, the expansion and maintenance of its transportation infrastructure must keep pace. How this is done will shape the nature and extent of environmental impacts and ultimately influence social and economic success. Central to this ripple effect is how the institutional system approaches urban planning as Foshan constructs and maintains its local and regional transport infrastructure. The Foshan Environmental Protection Bureau is responsible for “implementing state and provincial environmental protection laws, statutes, rules and policies, supervising the operation of all kinds of environmental protection systems, standards, and technical specifications46”. Foshan’s is a manufacturing-‐based economy, so transport infrastructure plays a critical role. Environmental protection will be increasingly important to ensure that the city is able to grow sustainably in the long term. This will need to 45
Guangdong Provincial Environmental Monitoring Centre and Environmental Protection Department, HKSAR. Pearl River Delta Regional Air Quality Monitoring Network: A Report of Monitoring Results in 2012 46
Foshan Environmental Protection Bureau http://www.foshanepb.gov.cn/fshbjout/english/responsibilities.html
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 125 include early mitigation of issues such as land, resource and materials use, along with air and noise pollution, biodiversity loss and global climate change. Illustrated below are three examples of how Foshan’s transport infrastructure is evolving towards sustainability by utilizing transit-‐oriented development (TOD) planning. TOD is an increasingly common approach to sustainable urban planning and infrastructure development. Its aim is to encourage alternative transit use, reducing GHG emissions to improve quality of life. 1. Dongping transport hub: Built mostly underground, the hub minimizes land use and frees space for other mixed-‐use development. The hub is intended to be a center for travel around Foshan because it connects multiple subway lines, local buses, airport transportation and the intercity railway. The hub also includes spaces for commercial, residential and office use. Once completed, it is expected to boost the value and efficiency of other transport infrastructure. 2. Lingnan Tiandi development: This 1.5 million square-‐meter Leadership in Energy and Environmental (LEED) gold-‐certified neighborhood development was designed to encourage low-‐carbon, environmentally friendly and holistically sustainable lifestyles. Most notable is that it makes walking the most convenient form of transport. At least 50 percent of housing is located within 800 meters of at least 10 different structures for public use47. The development is flanked by two major subway lines for easy access around Foshan. 3. Public bicycle systems: Both Guicheng and Chancheng offer bike-‐share schemes. Guicheng has 5,000 bikes in 102 stations and Chancheng has 7,600 bikes at 158 stations48. The aim is for them to be easily accessible and user-‐friendly, with the first hour free. This transport infrastructure creates opportunities for more people to travel around the city at low cost, improving health and boosting the local economy. Foshan may also consider aspects of green-‐transport infrastructure systems such as electric-‐vehicle charging stations, pedestrian corridors to encourage walking and additional bike-‐share stations. Lastly, Foshan’s institutions plays a critical role in both shaping the growth of its transport infrastructure and encouraging governance that is sustainable and beneficial to the city and its citizens. For example, the emissions/pollution rights infrastructure (ERI) comprises rules, agreements and institutions to define, 47
Leadership in Energy and Environmental Design (LEED), Neighborhood Development 2009: Lingnan Tiandi Development
48
Institute for Transportation and Development Policy C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 126 transfer and enforce emissions/pollution rights at the local, national, and global levels. Effective ERI can resolve disputes over environmental issues, encourage innovative solutions and establish an institutional foundation for a sustainable environment. Smart transport infrastructure can magnify its success. 7.5.2
Water infrastructure and pollution The expansion and maintenance of Foshan’s water infrastructure has failed to keep pace with the city’s rapid growth. In particular, its sewage system and water-‐treatment plants are significantly underdeveloped, resulting in serious environmental degradation and potential risks to the health and safety of residents. If these problems are left unchecked, they could significantly disrupt attempts at environmental improvement and place serious constraints on the city’s sustainable growth. A 2011 provincial report cited Foshan as a significant contributor to water pollution and one of four cities that discharge more than 500 million tons of wastewater into China’s rivers49. This is despite efforts to reduce rising environmental costs and encourage sustainable development. Almost half of Foshan’s wastewater comes from industry, which is about how much was discharged into the Pearl River in 2011. As a result, four of seven rivers in the delta do not meet water-‐quality standards. In 2011, Foshan operated 54 urban sewage plants, with the ability to process some 2.26 million tons daily. However, it used only 81 percent of total processing capacity. Why is such a significant proportion of untreated effluent discharged into rivers while treatment plants operate at less than full capacity? This inefficiency can be traced to the city’s inability to collect sewage. Its total of 1,406 of drainage is well below capacity. In 2011, the city built only 128 kilometers of sewage drainage. Thus, construction of drainage lags that of treatment plants. 49 Guangdong Province Annual Water Resource Report 2012 (广东省水资源公报
2012), Water Resource Department of Guangdong Province http://www.gdwater.gov.cn/yewuzhuanji/szygl/szygb/ C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 127 Water consumption (108 ton) Figure 7.3 | Foshan water consumption and sewage (2001-‐2011) 45 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Residential use Agriculture and forestry use Industrial use Other sewage Industrial sewage Note: Industrial, residential, agricultural and forestry use of water in area chart; industrial and ‘other’ sewage in column chart Source: Foshan statistical yearbooks (2002-‐2011); FGI analysis 250 1600 1400 1200 1000 800 600 400 200 0 200 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 2011 No. of sewage plants sewage capacity/day Pipe length Pipe Distance (km) Water plants capacity/day (104 ton/day) No. of Sewage plant and water plants sewage capacity (104 ton/day) Figure 7.4 | Foshan water-‐infrastructure development (2004-‐2011) Source: Foshan statistical yearbooks (2002-‐2011); FGI analysis There are several explanations for this shortfall. Foshan’s extensive urbanization makes the laying of sewage pipes costly and difficult. Furthermore, there is no policy or fiscal support to recover any investment in sewage-‐pipe construction. The problem is yet another illustration that the institutional structures underpinning China’s reform-‐driven growth model sometimes produces undesirable outcomes. As mentioned previously, GDP growth is often used as a metric in evaluating the performance of local-‐government officials and is strongly tied to their chances of promotion. There are no incentives for business to build sewage pipes or limit effluent discharge. This means that one of the C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 128 city’s most basic infrastructure services remains thoroughly underdeveloped, with significant impact on the environment. This issue is being addressed on several fronts. We have already discussed the greater emphasis being placed on environmental targets as the central government moves away from simple GDP figures as developmental indicators. For example, in its 12th Five-‐Year Plan, four of five listed environmental targets are binding. These policy directions are slowly filtering down to the local level, where spending on environmental protection has been gradually increasing. The State Council has also taken action to address national wastewater management. In September 2013, it released a policy document mandating that water infrastructure (including wastewater management) in cities under construction had to be planned and built simultaneously with the city’s development. Failure to do so would result in a halt in investment funding the construction. This adds significant weight to policy enforcement. This is a strong signal from the national leadership that it is taking both infrastructure development and environmental effects seriously. However, the rules do not apply to already-‐constructed cities such as Foshan. The policies, incentives and framework in which Foshan develops in the coming years will be crucial to ensuring that the city achieves balance as it continues to grow rapidly. Nanhai district’s experience of administrative and overzealous market decentralization has attracted attention for the wrong reasons. After its administrative and price decentralization, the district turned to water infrastructure. This enabled each of its 18 towns and townships to establish their own water companies. As a result, there were 18 different prices for water. This proved disastrous for investors because inconsistent prices significantly affected their ability to make decisions. This exaggerated form of price liberalization also severely affected local residents. As a result, in 2010 the local government department in charge of price regulation decided on policy measures to consolidate Nanhai’s water-‐pricing. As of 2012, pricing had yet to be consolidated. Nanhai’s experiences are perhaps indicative of the effects of excessive deregulation. However, this can be avoided with prudent governmental and regulatory oversight. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 129 8 F I N A N C E Finance is a crucial element of any economy and is central to development. It links initial endowments of capital with productive investment opportunities. In this way, people with innovative and useful ideas can access funding, facilitating growth. Unfortunately, this powerful mechanism is easily distorted and repressed, as it was severely before China’s reform era. The cost of financial repression was powerfully articulated separately by both McKinnon and Shaw in 1973. McKinnon summarizes the hypothesis: “Repressing the monetary system fragments the domestic capital market, with highly adverse consequences for the quality and quantity of real capital accumulation: 1.
The flow of loanable funds through the organized banking system is reduced, forcing potential borrowers to rely more on self-‐finance. 2.
Interest rates on the truncated flow of bank lending vary arbitrarily from one class of favored or disfavored borrower to another. 3.
The process of self-‐finance within enterprises and households is itself impaired. If the real yield on deposits, as well as on coin and currency, is negative, firms cannot easily accumulate liquid assets in preparation for making discrete investments. Socially costly inflation hedges look more attractive as a means of internal finance. 4.
Significant financial deepening outside the repressed banking system becomes impossible when firms are dangerously illiquid and/or inflation is high and unstable. Robust open markets in stocks and bonds and intermediation by trust and insurance companies require monetary stability. 5.
Inflows of foreign financial capital may be unproductive when the domestic capital market is in disarray and foreign exchange rates are unpredictable” (McKinnon, 1993). China’s financial system has changed enormously during the reform era, but the evolution to an efficient financial market still has very important steps ahead. Achieving that transition without inadvertently plunging the world’s second largest economy into financial crisis is one of the challenging objectives of the current leadership and is high among its priorities. 8.1
FINANCE IN CHINA’S EVOLVING G ROWTH M ODEL The financial sector in China has been transformed incredibly since the days of a single centrally directed bank prior to the reform era. Major financial policies and institutions are mostly determined at the national level in China, in contrast to other parts of the economy discussed in this report, where local governments C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 130 play a much more substantial role. Finance has relatively limited scope for localized policy experimentation because capital mobility makes sustaining divergent institutions and regulations highly problematic. Consequently, China’s central government has been forced to adopt a different process for financial reform and institutional evolution. This is ongoing, with major changes even since the 18th Central Committee of the CCP was selected in November 2013. Despite this progress there remains a major challenge. Structural problems mean different parts of the economy simultaneously have excess or insufficient liquidity. Private firms, especially SMEs, are often capital-‐starved, while too much liquidity flows to certain SOEs and regions. This results in many poor investments and leaves some local governments with substantial debt. The simultaneous existence of these problems is one consequence of the centrally directed local-‐growth model described in this report. Understanding the structural causes of these seemingly contradictory problems in China’s financial system is important. Among other things, it helps clarify why using monetary-‐policy instruments to address imbalances risks making things worse. China’s macro policy-‐makers typically focus on bad investments and consequent debt problems. However, Foshan’s authorities tend to be more concerned about insufficient liquidity and private-‐sector exclusion from capital markets. Despite having one of the highest GDPs of China’s 300-‐odd prefecture-‐level cities, Foshan faces declining export growth, challenges in industrial upgrading, potential property-‐market instability, local-‐government budgetary problems and energy and environmental issues. Relatively well-‐performing cities such as Foshan must successfully deal with the monetary tightening, economic restructuring, centrally imposed environmental and social-‐welfare improvements and other policies designed to move China towards more inclusive, sustainable and innovative growth. If not, then such policies are unlikely to work anywhere. It is crucial for policy-‐makers to devise implementable plans by encouraging the expansion of productivity-‐ and wealth-‐
enhancing behavior, while controlling the rent-‐seeking or speculative activities sometimes motivated by distortions in product and asset prices. Resolving the structural problems in the finance sector will relieve many of these burdens while also increasing the utility of macro policy. However, success will require changes to China’s growth model. Efforts to do so are already under way and will be discussed in this chapter. 8.1.1
Monetary and fiscal policy The 2008 stimulus package was widely lauded at the time, but has since come to be seen as symbolic of many of China’s problems and contradictions. A large part of the package was delivered through the banking system – a retreat from C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 131 market-‐oriented reforms that treated the main commercial banks as policy agents. Wang and Zhou report that “bank loans were greatly relaxed in 2009, which increased by RMB10 trillion or one-‐third of the level of the previous year. This led to extremely eased monetary supply and rapid expansion of the scale of investment” (Wang & Zhou, 2014, p. 58). A substantial amount of this investment went into expanding short-‐term productive capacity, with the consequence that capacity far exceeded demand and many factories were left idle. To avoid multiplying this outcome, infrastructure construction and projects with long-‐term productivity gains became highly favored, especially by local governments, including Foshan. The Sino-‐German zone and the Pearl River Delta financial hub discussed elsewhere in this report partly fall into this category, while also supporting centrally mandated efforts towards industrial upgrading. In the wake of the massive stimulus, China faced a flood of cheap credit that was beginning to create serious adverse economic effects. Worried about a potential asset bubble and growing debt, Beijing began tightening credit in 2010 through monetary policies and the national banks. The pace of money growth slowed from over 25 percent in 2009 to under 14 percent in 2013. In response, lending was prioritized for large enterprises and government-‐backed projects. SMEs enjoyed no such privilege and lending to them dried up. 8.2
FINANCIAL A ND M ONETARY INSTITUTIONAL EVOLUTION China’s financial reforms and institution-‐building have come a long way. Recent measures include regulatory reform, capital-‐account liberalization and renminbi internationalization. However, many issues remain of concern. For example, the cost of fragmenting the national market is too great, but the mobility of capital means local experiments in an integrated market are more likely to create problems than solutions. China’s leaders are risk-‐averse, cautious but consistent reformers. So, while the financial system has evolved constantly since China began pursuing development instead of class struggle, these reforms have built many new financial institutions, while simultaneously repressing their operations to some degree. Interest rates are a key tool of central financial control. McKinnon (1973) has demonstrated that repressed deposit rates reduce the share of financial assets in total savings, meaning banks have less to lend. In such a case, they typically lend to borrowers with the most collateral. In China, the safest borrowers are central SOEs. Thus, they dominate lending, crowding out SMEs and other private firms. Beijing has already liberalized lending rates, but some restrictions remain on deposit rates, particularly at the retail level. Further liberalization is expected in the year ahead. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 132 8.3
FINANCE IN FOSHAN Banking is the main formal source of financial intermediation in all developing economies. However, Foshan exhibits stronger symptoms of financial repression than elsewhere in China. While deposits and loans grew steadily during the past decade, loans as a share of GDP have been below the national average since 2003, as have deposits since 2006 (Figure 8.1). One possible explanation is that, with the provincial capital of Guangzhou so close, many Foshan residents hold their accounts there. However, this would not fully account for the city’s relatively low deposits or their significant declines relative to GDP between 2003 and 2008. It is likely that Foshan is more strongly affected by the first of the adverse consequence of financial repression identified by McKinnon and noted at the start of this chapter. That consequence is a reduction in the flow of funds through the organized banking system, forcing potential borrowers to rely more on self-‐financing or shadow banking. Percent Figure 8.1 | Deposits relative to GDP in Foshan and China (2003-‐2012) 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Foshan China Source: Foshan statistical yearbooks (2004-‐2013); NBS C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 133 Percent Figure 8.2 | Loans relative to GDP in Foshan and China (2003-‐2012) 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Foshan China Source: Foshan statistical yearbooks (2004-‐2013); NBS Million RMB Figure 8.3 | Foshan bank deposits by source (1984-‐2010) 50 45 40 35 25 Urban and rural households Corporations 20 Others 15 Public Institutions 10 Agricultural 30 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 5 Source: Foshan statistical yearbooks (2001-‐2010); Foshan city records (1984-‐2000) Figure 8.3 shows Foshan’s deposits by source since 1984. Household savings have accounted for almost half the total since the early 1990s, with companies responsible for about a quarter. The share from each has been roughly consistent, except for 2008-‐2009. Huang and Wang (2014) believe the propensity of bank lending to favor the state sector constrains efficient capital allocation in China. They note that SOEs C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 134 produce less than one-‐third of total output yet receive more than half of bank lending, while SMEs struggle to secure loans. Foshan’s above-‐average number of SMEs but comparatively few central SOEs may account for its relatively low formal banking intermediation. Data on the distribution of bank loans in Foshan provide some support for this view, although statistics on long-‐term loans are incomplete. Billion RMB Figure 8.4 | Short-‐term versus long-‐term loans in Foshan (1984-‐2010) 500 400 300 200 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 100 Short Term Long Term Source: Foshan statistical yearbooks (2001-‐2010) Billion RMB Figure 8.5 | Distribution of short-‐term loans in Foshan (1984-‐2009) 200 150 100 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 50 TVEs Industry Foreign Invested Enterprises ConstrucZon Others Commerce Private Sector & Individuals Agriculture Source: Foshan statistical yearbooks (2001-‐2010) Figure 8.4 shows that, from 1984 until 2000, about 90 percent of bank loans in Foshan were short-‐term. Between 1984 and 1990, 50-‐60 percent of these went C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 135 to commercial enterprises, while industry secured most of the remainder. After 1990, “other” short-‐term loans accounted for about one-‐quarter, displacing commerce, which fell from more than 60 percent in 1984 to a low of 10 percent in 2006. The other major change in the distribution of short-‐term loans was the share directed to TVEs. This was negligible until 1994, when it jumped to almost 30 percent and then gradually rose to almost 40 percent in 2009. The remaining categories of short-‐term loan recipients (agriculture, construction, the private sector and individuals and foreign-‐invested enterprises) collectively received about 5 percent of the total throughout the period, exceeding this only briefly between 2001 and 2005, when foreign-‐invested enterprises attracted 5 percent. However, from 2000 onwards, the value of short-‐term loans in Foshan barely rose. They eased from RMB125 billion in 2000 to RMB108 billion in 2005 and then climbed again to RMB153 billion by 2010. Almost all the growth in Foshan over this period has been in long-‐term loans, which climbed from just RMB8 billion in 1999 to RMB306 billion in 2010. This represents a major structural change in the asset side of the banking system, which should have a favorable impact on the economy. However, this study is not able to provide detailed analysis of the subject. Indeed, data on the distribution of these loans are not available. The most likely long-‐term loans are for mortgages and borrowings for large infrastructure projects. Figure 8.6 | Schematic of Foshan’s financial system (2007) Source: Foshan government (FGI interviews, 2013) 8.3.1
Fixed-‐Asset Investment in Foshan China’s statistics on fixed-‐asset investment (FAI) measure reported gross value by all economic entities. Thus, they include double-‐counting (such as when a residential flat changes hands twice in a year) because they are not based on the sum of value added. FAI data are different from net-‐investment statistics, which include only investment-‐related value added, using GDP accounting. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 136 Between 2000 and 2012, most utilized investment was self-‐financed. This reached a peak of two-‐thirds of Foshan’s total in 2008, easing to 59-‐62 percent in subsequent years (see Figure 8.7). Throughout that period, foreign investment contributed just 5-‐7 percent of fixed-‐asset investment, while that financed by bank loans fell from a peak of 23 percent in 2001 to 12 percent in 2012 (ignoring the complete cessation of such lending in 2008). “Other” financing has outperformed bank loans but followed a similar trend from at least 2000 until 2010, when it appears to have displaced a portion of bank lending. Thus, foreign investment has not been an important source of funding for Foshan. However, it was crucial in terms of importing the likes of technology, market networks and sophisticated management. Banks’ movement of items off their balance sheets into the shadow-‐banking market may account for the above discrepancy. They would have created more wealth-‐management products by diverting funds from traditional deposits to support higher margin lending. The data suggest strong financial repression in Foshan and a weak banking sector failing to service investment demand. Bonds and other elements of the capital market are even less present. The high share of “other” financing, at about 25 percent, suggests that part of the sector’s weakness results from its having been regulated out of the market. Banks apparently rely on shadow-‐market activities to meet at least some of the demand that their standard operations miss. It is likely that the interest-‐rate repression and liberalization of other financial sectors, under the policy implementation of the central government, have prompted banks to gradually participate in such activities. This creates distortions and additional risk. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 137 Figure 8.7 | Sources of fixed-‐asset investment in Foshan by value (2000-‐
2011) RMB Billion 160 140 120 Self |inancing 100 Other |inancing 80 Domestic loans 60 Utilized foreign capital 40 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 20 Source: Foshan statistical yearbooks Percent Figure 8.8 | Sources of fixed-‐asset investment in Foshan (2000-‐2011) 70 60 Self-‐|inancing 50 Other |inancing 40 Domestic loans 30 Utilized foreign capital State budget 20 Bonds 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 10 Source: Foshan statistical yearbooks Foshan deviates significantly from the national economy in its investment in fixed assets. In China, the ratio between fixed-‐asset investment and total GDP has grown steadily since 2003, when it was about 30 percent. It rose especially fast over 2008-‐2009 as China invested its way through the global financial crisis and surpassed 70 percent in 2012. However, in Foshan, such investment remained at C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 138 an almost constant 30 percent of GDP throughout the decade to 2013. These divergent trends are presented starkly in Figure 8.9. The right side shows a similar, though less extreme, divergence in real-‐estate investment as a share of GDP. Nationally, property investment doubled from 9 percent of GDP in 2004 to almost 20 percent by 2012, whereas in Foshan it rose from about 6 percent to only about 9 percent over that time. We discussed the distribution of Foshan’s final expenditure in detail in section 3.4, but the investment portion bears repeating in the context of financial intermediation. The unusually high share of investment in China’s final expenditure is often criticized as unsustainable and evidence that its growth may be inflated through unwarranted or uneconomical projects. However, this appears not to apply to Foshan. Given its ranking among China’s larger municipalities with high per capita GDP, this suggests that key segments of the country’s economy may not face the same structural problems that are often assumed to be national issues. Figure 8.9 | Investment in fixed assets as a share of GDP (2003-‐2012) Percent 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Foshan China Source: Foshan statistical yearbooks (2004-‐2013); NBS C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 139 Figure 8.10 | Investment in real estate as a share of GDP (2003-‐2012) Percent 20 18 16 14 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Foshan China Source: Foshan statistical yearbooks (2004-‐2013); NBS 8.3.2
Underdeveloped financial sector As at the national level, Foshan’s non-‐banking financial sector is substantially underdeveloped. Despite the city’s population of 7.3 million and GDP exceeding RMB700 billion, it has only 14 securities companies to facilitate trades on the two national sharemarkets of Shanghai (established in 1990) and Shenzhen (1991)50. The framework depicted in Figure 8.11 suggests that financial-‐market systems depend on information quality and economic development. Where these are weak, informal financial activity and banking dominate, whereas more developed economies with higher quality of information are dominated by securities markets. China’s total bank lending is currently about 120 percent of GDP, compared with about 40 percent in the USA. Its total securities-‐market capitalization is about 42 percent, compared with about 120 percent in the USA. 50 Regulations for listing on these stock exchanges can be found at: Shanghai: http://www.sse.com.cn/marketservices/listing/tobelisted/listcondition/#1; and Shenzhen: http://www.szse.cn/main/files/2014/06/19/467054205921.pdf C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 140 Figure 8.11 | Development path of financial markets Source: Leung (2006) Foshan firms have access to securities markets, but they are not a common source of funding. In 1993, Midea raised RMB192 million through the Shanghai Stock Exchange, allowing it to expand production and become China’s leading air-‐conditioner producer. It subsequently raised RMB2.3 billion and RMB4.4 billion through seasoned equity offerings. Equity-‐market access helped Midea grow from an SME into a large company with annual sales of RMB140 billion in 2011. But Midea is an exception. Capital markets remain underdeveloped in Foshan. The city boasts about 30 listed companies that collectively raised RMB27 billion from initial public offerings (excluding seasoned equity), with a total market value of RMB268 billion. However, many important segments of the local economy have not accessed security markets at all. Lecong is home to China’s leading furniture manufacturers, but none has listed. The capitalization of Foshan’s listed firms in 2012 amounted to only 40 percent of GDP – similar to that of Guangzhou, but far below Shenzhen’s 212 percent of GDP. By comparison, the total assets of Foshan’s enterprises was RMB884 billion in 2012, or 132 percent of GDP. Table 8.1provides a comparison with other Chinese cities and their levels of capitalization in 2009. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 141 Table 8.1 | Market capitalization (A & B shares) relative to GDP in select cities (2009) City Percent Shenzhen 212 Zhuhai 117 Nanjing 80 Hangzhou 48 Ningbo 45 Guangzhou 41 Foshan 40* Wuxi 35 Suzhou 14 Huizhou 13 Dongguan 8 Note*: Foshan includes all listing locations; others include only A & B shares To help increase access to capital, Foshan created the first capital operating platform in 2008, coordinated by the provincial and municipal authorities in Guangdong. The Foshan Southern Assets & Equity Exchange51 facilitates property-‐rights trading, investment and financing. However, it has conducted only about RMB360 million worth of transactions since 2008 and remains at an experimental stage, with limited success so far. China’s economic diversity means it cannot fit neatly into a framework as simple as that presented in Figure 8.11. Informal finance is still hugely important for large sections of the economy, with shadow banking a key concern of financial-‐
sector economists. Meanwhile, developments in mobile and internet banking (led by the likes of Alibaba and Tencent) use massive data sets, which in many cases include every transaction in a firm’s history, to automatically approve or reject loan applications almost instantly. Such developments have enormous potential to transform China into a far more sophisticated financial market and efficient allocator of capital. That said, they are new and, as such, potential risks are not fully apparent or understood. China is becoming a pioneer in internet banking, on the back of its enthusiastic embrace of online trading. Thus, it falls to China’s financial regulators to pioneer governance of this new type of financial product. It is a significant challenge, with high stakes. 51
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C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 142 SMEs struggle to access finance SMEs dominate Foshan’s economy. In 2010, they provided employment for 1.4 million people in the industrial sector, or 77 percent of its total, as well as accounting for 53 percent of the city’s GDP (see Figure 8.12). Billion RMB Figure 8.12 | Contribution to Foshan’s GDP by industrial-‐enterprise size (1998 and 2010) 200 180 160 140 120 100 80 60 40 20 0 1998 Large Enterprises 2010 Medium Enterprises Small Enterprises Source: Foshan statistical yearbooks (1999, 2011) Thousand People Figure 8.13 | Contribution to Foshan’s total industrial employment by industrial-‐enterprise size (1998 and 2010) 900 800 700 600 500 400 300 200 100 0 1998 Large Enterprises 2010 Medium Enterprises Small Enterprises Source: Foshan statistical yearbooks (1999 and 2011) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 143 It is extremely difficult for SMEs to obtain credit in China. This is partly due to their being inherently more risky than large, established firms (see Figure 8.14 for a comparison of non-‐performing loans by enterprise size). As well, the transaction costs of lending small amounts to many clients are much higher than those associated with large loans to only a few clients. So there are structural reasons for banks to favor large firms. An element of moral hazard inherent in SMEs creates additional incentives for banks to favor the state sector. Because most large banks are themselves SOEs, they are more susceptible to government directives that favor lending to SOEs for policy reasons. Consequently, SMEs typically rely on self-‐finance or informal sources of funding such as from family and friends. Percent Figure 8.14 | Non-‐performing loan ratios of Foshan firms by size 3.0 2.6 2.5 2.0 1.5 1.25 1.09 1.0 0.5 0.0 0.25 Large Medium Small Micro Source: National Bureau of Statistics: http://data.stats.gov.cn/workspace/index?m=hgnd Transaction costs for SME financing inhibit demand as well as supply. High interest rates on top of burdensome procedures such as securing credit ratings and obtaining collateral or loan guarantees can discourage small firms from seeking bank financing. Access to capital is a serious constraint. In 2008, the capital demand from Guangdong’s SMEs was estimated at RMB2 trillion – 150 percent more than was 52
actually lent . To help diversify SME financing needs into the bond market, Foshan established the SME Bond Protection Fund, with seed capital from municipal revenue. In this way, 27 SMEs issued a combined corporate bond, guaranteed against default by 52 http://finance.sina.com.cn/china/hgjj/20080425/02404798498.shtml C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 144 the fund. As a result, the credit rating of these firms rose from BB+ individually to AAA combined. After the issuance, the firms were required to deposit 53
proceeds pro rata into the fund to be reimbursed once the bonds were repaid. However, this financial innovation alleviated the stress for only a few SMEs. As well, it created a non-‐market intermediary responsible for selecting, pooling and managing the combined bonds. Scaling this operation up to include more enterprises may create a cumbersome organization performing tasks better left to the market. The above discussion supports Huang and Wang’s (2014) conclusion that the lack of bank lending to SMEs is now “an important constraint on the efficiency of capital allocation”. Shadow banking emerges to fill the gap China’s controversial shadow-‐banking market emerged to fill the gap between the demand for financing and what is either allowed or economical, given the country’s financial regulations. It operates as a partial de facto financial liberalization, especially on interest rates, since it exists off-‐book and outside governance. Huang and Wang explain that, “as the market becomes impatient with strict interest rate regulations, it disintermediates the banks and develops large volumes of non-‐credit financial products” (2014). Consequently, a dual interest-‐rate system has emerged. This comprises an official lower rate available only to a favored market segment and a higher, shadow rate that meets the demand of a broader segment but carries the risk that the courts may not recognize contracts. Faced with few alternatives, many SMEs turn to shadow banking. Although there have been no reports of widespread default, Foshan’s deputy mayor has said 54
that 80 percent of enterprises, particularly SMEs, face financial stress . The high costs of shadow banking constrain economic growth and create systemic risks of default. 8.4
PUBLIC FINANCES Zhu Rongji, who served as Vice Premier from 1991 to 1998 and Premier from 1998 to 2003, is credited with a number of significant reforms. These include centralization of fiscal resources, further marketization of the economy and monetary stabilization (Naughton, 2007). These became critical themes in 53 南方日报：佛山发
3.59 亿中小企集优债政府主导提升信用，2011 年 11 月 15 日。
54 http://ccnews.people.com.cn/BIG5/15506979.html
C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 145 tiáotiáo guidance of the economy. Below, we discuss the first of these, fiscal centralization, which was the key to the 1994 tax reforms. 8.4.1
Tax-‐sharing system of 1994 In 1994, Zhu led a major reform of China’s fiscal system that was promulgated by the State Council at the end of 1993. This was in response to concerns about a decline in government revenue as a percentage of GDP and especially a drop in Beijing’s contribution as a share of total government revenue. The impact of this reform of the tax-‐sharing system (fēnshuìzhì 分税制) was dramatic. Local authorities’ contribution as a share of total government revenue plummeted, even though they continued to be responsible for most government expenditure (see Figure 8.15). This system largely continues today, although further substantial fiscal reforms are due to be implemented by 2016, with an even more ambitious agenda planned for 2020 (Rosen & Bao, 2014). Percent Figure 8.15 | Local-‐government contribution as a percentage of total government revenue and expenditure (1978-‐2013) 90 85 80 75 70 Local government revenue 65 60 Local government expenditure 55 50 40 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 45 Source: NBSC VAT was a key feature of the reform. Its main categories and rates are presented in Table 8.2. Three-‐quarters of VAT goes to the central government, with the rest set aside for local authorities. VAT is China’s main tax. In 2002, it contributed almost half of total state tax revenue (China.org.cn, 2007). Because both local and central authorities receive a high portion of their revenue from value-‐added activities, VAT aligns the incentives of different levels of government with a profitable private sector. This means central and local officials are strongly C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 146 motivated to encourage value-‐adding activities, thus supporting China’s unusually high investment rate. Table 8.2 | Coverage and rates of China’s VAT Coverage Exported goods (except those stipulated by the state) Agriculture, forestry, farm-‐animal products, aquatic products Edible vegetable and grain duplicates Tap water, heating, cooling, hot-‐air supply, hot water, gas, liquefied-‐petroleum gas, natural gas, coal/charcoal products for households; Books, newspapers, magazines(except those distributed by post) Animal feed, chemical fertilizers, agricultural chemicals, agricultural machinery, plastic converting film for farming Select mineral products, coal Crude oil, mine salt, goods other than those listed above Taxable services Source: China.org.cn (2007) Rate 0% 13% 17% As with most of China’s reforms, that of taxation required local governments to respond to and implement the central decrees. In 1981, Foshan introduced an export-‐tax rebate in accordance with State Council policy. Over 1981-‐1984, it rebated RMB50 million, rising sharply at an average annual growth rate of 35 percent to RMB15 billion over 1985-‐2002. The rebate strongly promoted exports. Such policies were instrumental in creating a favorable business environment and the rapid development of Foshan’s enterprises during the early stages of the city’s development. 8.4.2
Government revenue of Foshan Foshan’s municipal budgetary revenue grew from RMB2.1 billion in 1994 to RMB20.6 billion in 2000, RMB34.2 billion in 2011, RMB38.4 billion in 2012 and RMB43.8 billion in 2013. This does not include extra-‐budgetary revenue such as land sales, which are a key sources of funding for large local infrastructure projects. Sources of budgetary revenue over the period are given in Table 8.3. The VAT contribution decreased significantly, from 38 percent in 1994 to 18 percent by 2011. That from business tax also decreased, from 20 percent to 15 percent. The contributions from personal and company income tax, as well as city maintenance and construction taxes, did not change much over time. However, the “other” 55 component of Foshan’s fiscal revenue increased from 4 percent of the total in 1984 to almost 35 percent in 2011. This implies a 55 These may include many types of ad hoc fees and charges, but their definition is unclear. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 147 significant change in fiscal structure that cannot be well analyzed using a standard tax-‐accounting framework since more than one-‐third of revenue is from a nondescript source. Greater transparency about the components of the “other” item would help answer the question of what drives the growth of local fiscal revenue. Clearly, the system has been undergoing profound transformation as the productivity and land values of local economies continue to improve. Land revenue is another major source of income for Foshan that is not considered part of budgetary fiscal revenue. In 2012, fiscal revenue alone was RMB38 billion. Land revenue accounted for a further RMB28 billion and rising. Table 8.3 | Foshan government revenue (1994-‐2011) (RMB100 million) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VAT 7.9 9.1 10.7 10.7 12.5 15.5 17.8 23.7 24.2 25.1 13.7 31.9 39.3 45.8 55.4 56.3 59.8 61.9 Business 4.2 5.4 3.5 3.5 3.9 6.4 9.4 14.7 19.0 20.9 21.9 24.8 29.1 37.0 39.4 46.7 55.8 51.6 Personal income -‐ -‐ -‐ -‐ -‐ 2.1 3.0 6.2 4.2 4.2 5.0 5.8 7.0 8.3 10.0 10.4 12.9 12.6 Maintenance & construction 1.1 1.3 1.5 1.8 2.0 2.6 2.8 4.3 5.3 6.7 6.8 8.1 10.2 12.0 13.8 13.6 16.7 27.7 Agriculture 2.2 2.3 2.3 2.3 2.8 3.4 5.1 6.5 7.0 8.1 10.9 17.0 13.4 19.4 16.4 26.1 39.0 36.7 Company income 2.4 3.1 3.1 3.1 4.6 7.4 12.8 15.9 9.0 8.6 10.7 13.0 15.3 19.1 23.5 20.3 28.3 32.8 Other 0.9 1.1 1.1 3.0 4.8 8.7 8.9 12.1 16.4 21.6 26.2 30.4 42.8 52.9 69.4 81.2 93.6 118.4 Source: Foshan statistical yearbooks (1995-‐2012) 8.4.3
Government expenditure of Foshan Foshan’s budget expenditure does not include large local infrastructure investment as this is funded by extra-‐budgetary revenue such as land sales. The regular budget expenditure covers only a small set of civil and social activities allowed by central rules and regulations. In reality, cities such as Foshan have many innovative ways to finance social services, from extra-‐budgetary revenue through various public-‐private partnership programs, usually linked to LGFPs (as discussed in Chapter 7). This means that Foshan’s budgetary revenues and expenditures reflect only part – and perhaps a small one, at that – of the city’s involvement in the economy. From 1994 to 2006, the share of expenditure on basic construction remained mostly constant, increasing from 1.07 percent to 1.88 percent. However, the share that went on education fell from 30 percent in 1994 to less than C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 148 15 percent in 1999, where it remained until 2001. This major relative decline in education spending was offset by increased spending on “other”. Post-‐2006, educational expenditure rose again relative to the total, from 18 percent to 21 percent the next year, where it stayed until 2011. Consistent with Foshan’s performance-‐evaluation criteria, discussed in section 3.3.4, environmental-‐protection spending increased from less than 1 percent of total expenditure in 2007 to almost 6 percent four years later. This reflects the efficacy of tiáo-‐kuài dynamics and is clear evidence that China is bringing its policy tools to bear on environmental issues. As with revenue, almost half of Foshan’s total spending is buried in the “other” item of the city’s accounts. This highlights the need for more transparency and reform of financial-‐reporting rules and practices. 8.4.4
Local-‐government debts in China and Foshan One of the major concerns about China’s economy is its significant and largely opaque local-‐government debt. This section provides a detailed analysis of exactly what and how much debt the Foshan government is carrying. The National Audit Office’s most recent survey of local-‐government debt (to June 2013) provides a starting point. The RMB17,891 billion total can be broken down by type as follows: 1. LGFPs: RMB6,970 billion (39 percent); 2. Government departments and institutions: RMB4,060 billion (23 percent); 3. SOEs: RMB3,136 billion (18 percent); 4. Public institutions with government subsidies: RMB2,395 billion (13 percent); and 5. Self-‐funded public institutions: RMB603 billion (3 percent). The total can also be disaggregated by level of government as follows: 1. Provincial-‐level governments: RMB5,194 billion (29 percent); 2. Municipal-‐level governments: RMB7,290 billion (41 percent); 3. County-‐level governments: RMB5,042 billion (28 percent); and 4. Town/village-‐level governments: RMB365 billion (2 percent). Thus, municipal and county governments accounted for almost 70 percent of the total local-‐government debt. In terms of repayments, an estimated RMB6,863 billion (38 percent) was due in 2014, with a further RMB6,149 billion (34 percent) over 2015 and 2017 and the C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 149 remaining RMB4,880 billion (27 percent) after that. This suggests that about 38 percent of debt had a two-‐year maturity, and 34 percent about a five-‐year maturity. The declines in repayments were based mainly on assumptions of no new debt or restructuring. Furthermore, provincial, municipal and county governments were directly and materially responsible for repayments of only RMB9,364 billion (52 percent of the RMB17,891 billion total). The remaining RMB8,527 (48 percent) was in the form of loan guarantees and contingent liabilities. Since these two types of local debt carry different risks, we use the following terminology: “gross debt and liabilities” for the RMB18,891 billion total; “direct debt” for the RMB9,346 billion of materially realized debt; and “contingent liabilities” for the RMB8,527 billion of guarantees and contingent liabilities. In these terms, total local-‐government “gross debt and liabilities” in 2013 was equivalent to 31.5 percent of China’s GDP, with “direct debt” equivalent to 16.4 percent and “contingent liabilities” equivalent to 15.1 percent. For the combined group of municipal, county and town/village, which is the right benchmark for Foshan, “gross debt and liabilities” were equivalent to 22.3 percent of GDP, with “direct debt” equivalent to 11.7 percent and “contingent liabilities” equivalent to 10.6 percent (see Table 8.4). Table 8.4 | China's local-‐government debt and liabilities (2013)* (RMB billion) Gross debt & liabilities Direct debt Contingent liabilities National total 17,891 (31.5%)** 9,364 (16.4%) 8,527 (15.1%) Provincial 5,149 (9.1%) -‐ -‐ Municipal 7,290 (12.8%) -‐ -‐ County 5,042 (8.9%) -‐ -‐ 365 (0.6%) -‐ -‐ 12,697 (22.3%) 6,646 (11.7%) *** 6,051 (10.6%)*** Town/village Sum of municipal, county & town/village * Based on the National Audit Office Survey (with information up to 6/2013) ** Equivalent percentage of China’s RMB56,886 billion GDP in 2013 *** Assumes same ratios of direct debt and contingent liabilities over gross debt & liabilities as in national total Source: National Audit Office survey (to June 2013) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 150 Foshan’s local-‐government debt The National Audit Office does not provide separate, detailed data on Foshan’s debt and liabilities and we have not been able to obtain data from other sources. However, in March 2014, a senior Foshan official revealed56 that the city’s total public debt and liabilities were RMB140 billion, which was equivalent to about 20 percent of its GDP in 2013 (see Table 8.5). Table 8.5 | Foshan and the national local debt and liabilities (2013) Gross debt & liabilities Direct debt Contingent liabilities National total 12,679 6,646 6,051 (10.6%) (22.3%)** (11.7%) 140 73* 67* (20.0%)*** (10.4%)*** (9.6%)*** Foshan * Assumes same ratios of direct debt and contingent liabilities over gross debt & liabilities as in national total ** Equivalent percentage of China’s RMB56,886 billion GDP in 2013 *** Equivalent percentage of Foshan’s RMB701 billion GDP in 2013 Source: National Audit Office; FGI estimates However, the official did not disclose any detailed breakdown. During interviews we conducted in September 2014, Foshan officials suggested that this RMB140 billion was closer to the concept of “gross debt and liabilities” than “direct debt”. We interpret the figure as being Foshan’s total debt and liabilities, including guarantees and other contingent liabilities. Thus, its ratio of total debt and liabilities over GDP would have been about 20 percent – in line with the national average of 22 percent. The RMB140 billion figure appears low by international standards. However, Foshan is a local government, not a sovereign nation, and its budgetary and land-‐
sales revenues were only 6.2 percent and 5.2 percent, respectively, of its GDP. Substantial taxes and fees from Foshan’s economy were collected by the central and provincial governments. As well, the city cannot issue debt instruments directly, under the current national regulations. Further, Foshan lacks the advantage of significant assets in the form of SOEs it could sell because it has few under its control other than LGFPs. 56 http://zqb.cyal.com/html/2014-‐03/08/nw.D110000zgqnb_20140308_1-‐T02.htm C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 151 Indeed, most of Foshan’s debt and liabilities are incurred through 48 LGFPs, established to raise funds for large infrastructure and civil projects. In 2008, when Beijing launched its RMB4 trillion stimulus in response to the global financial crisis, it asked local governments to identify promising projects that could absorb this investment. As a result, the numbers of LGFPs grew significantly, contributing to a substantial increase in debt and liabilities nationwide. This was particularly so in Foshan, given its relatively low historical fixed-‐capital investment compared with the national average (see our discussions in Chapter 7 on infrastructure). The key question is whether the infrastructure projects could generate enough positive cashflow to repay the LGFPs’ debt and liabilities. If so, then the projects would enhance the city’s productivity through better planned and coordinated infrastructure construction. If not, such investment risked creating overcapacity, ghost towns and a local debt crisis. The default risk of local-‐government debt has become a growing concern for central and local governments, as well as international investors, given that China’s economic growth has slowed significantly since 2011. Foshan’s total debt and liabilities of RMB140 billion in 2013 is equivalent to about USD22.2 billion and is reportedly the second largest among municipalities in Guangdong Province. By comparison, Detroit’s debt was about USD18-‐20 billion when it declared bankruptcy that same year. To assess the default risk of Foshan’s government debt and liabilities, we need to estimate its likely repayments over the next few years. This is difficult without detailed official statistics about the debt structure. However, based on the limited data for Foshan and China, we are able to suggest several scenarios. Table 8.6 shows the basic public-‐finance data available for Foshan, including budgetary revenue and expenditure plus land-‐sales revenue for 2010, 2011 and 2012. Foshan officials told us that their rule of thumb for managing the city’s debt was to limit repayments to about 60 percent of budgetary revenue and 30 percent of total revenue, which includes land sales. This suggests that debt-‐service payments were about RMB20 billion in 2012, when Foshan’s budgetary revenue was RMB38.4 billion and that from land sales was RMB27.8 billion. Thus, repayments for 2012 would have amounted to about 52 percent of budgetary revenue (20/38.4), 30.2 percent of total revenue (20/66.2) and 23 percent of total debt and liabilities (20/92.5). The same rule of thumb suggests that repayments were about RMB25 billion in 2013, when Foshan’s budgetary revenue was RMB43.8 billion and that from land sales was RMB 36.2 billion. Thus, repayments for 2013 would have amounted to about 57 percent of budgetary revenue (25/43.8), 31.3 percent of total revenue (25/80) and 18 percent of total debt and liabilities (25/140). C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 152 Putting the size of Foshan’s debt series into perspective, Table 8.7 shows the relevant statistics as a percentage of the city’s GDP. In 2012, Foshan had budgetary revenue equivalent to 5.7 percent of its GDP, land-‐sales revenue equivalent to 4.1 percent, budgetary expenditure equivalent to 6.5 percent, debt-‐service payments equivalent to 2.9 percent and outstanding debt and liabilities equivalent to 13.8 percent. In 2013, Foshan had budgetary revenue equivalent to 6.2 percent of its GDP, land-‐sales revenue equivalent to 5.2 percent, debt-‐service payments equivalent to 3.6 percent and outstanding debt and liabilities equivalent to 20 percent. No figures were available for budgetary expenditure. Table 8.6 | Foshan public finance (RMB billion) Revenue Expenditure Budget Debt service Total Total debt & liabilities Year Budget Land sales 2010 30.6 19.3 49.9 36.3 n.a. 36.3 n.a. 2011 34.2 27.1 61.3 38.9 n.a. 38.9 n.a. 2012 38.4 27.8 66.2 43.3 20* 61.3 92.5 2013 43.8 36.2 80 n.a. 25* n.a. 140 Debt service Total Total debt & liabilities Total Note: n.a. = not available; * implies FGI estimates Source: Foshan statistical yearbooks; Foshan government; FGI analysis Table 8.7 | Foshan public finance (as percentage of its GDP) Year Revenue Budget Land sales Expenditure Total Budget 2010 5.4 3.4 8.8 6.4 n.a. 6.4 n.a. 2011 5.5 4.4 9.9 6.3 n.a. 6.3 n.a. 2012 5.7 4.1 9.9 6.5 2.9* 9.1 13.8 2013 6.2 5.2 11.4 n.a. 3.6* n.a. 20 Note: n.a. = not available; * implies FGI estimates Source: Foshan government; FGI analysis To assess the reliability of our rule-‐of-‐thumb estimates of debt-‐service payments, we consider independent estimates based on current interest rates and term structures of the debt. Estimates in the following tables are based on several reasonable scenarios. First, we note a few considerations taken into account when choosing these scenarios. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 153 Based on the limited information from the government and industry players, loans extended to Foshan’s LGFPs are mainly of about two years’ duration. According to industry sources, banks charge about 6 percent annual interest for local-‐government loans. Trust companies and other private sources charge 10-‐12 percent. Table 8.8 provides two estimates of Foshan’s 2013 debt-‐service payments: a high-‐debt scenario for the RMB140 billion total debt and liabilities; and a low-‐
debt scenario for the RMB73 billion direct debt, which excludes the RMB67 billion worth of contingent liabilities. We assume a payment schedule as follows: 40 percent is three-‐year loans at a 5.5 percent rate; 30 percent is five-‐year loans at 6 percent; 20 percent is 10-‐year loans at 6.5 percent; and 10 percent is 20-‐year loans at 7 percent. These assumptions are likely to be conservative. National survey data shows local governments obtain only about 57 percent of loans from banks. Other financing options typically have higher interest rates and shorter maturities. It would be reasonable to assume that the lower the level of government and their LGFPs, the smaller the proportion of traditional bank loans in their debt structure. On the other hand, local governments can repay their debts directly with revenue from land sales or other market sources such as leasing government-‐owned real estate. Under the high-‐debt scenario, with RMB140 billion total debt and liabilities, interest payments for the first year would be RMB8.4 billion and principal payments RMB30.6 billion. This amounts to total debt-‐service payments of RMB39 billion – equivalent to 89 percent of budgetary revenue, 48 percent of total revenue (including land sales) and 5.6 percent of Foshan’s 2013 GDP. Under the low-‐debt scenario, with RMB73 billion direct debt (excluding contingent liabilities), interest payments for the first year would be RMB4.4 billion and principal payments RMB15.9 billion. This amounts to total debt-‐service payments of RMB20.3 billion – equivalent to 46.3 percent of budgetary revenue, 25.4 percent of total revenue (including land sales) and 2.9 percent of Foshan’s 2013 GDP. Thus, the RMB25 billion debt-‐service payment figure suggested by the Foshan officials’ rule-‐of-‐thumb guide falls between and towards the bottom end of our low (RMB20.3 billion) and high (RMB39 billion) scenarios. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 154 Table 8.8 | Estimated 2013 debt-‐service payments of Foshan government Debt-‐service payment (RMB billion) Scenarios* Interest Principal Total Debt-‐service ratio As % of budgetary revenue (RMB43.8 billion) As % of total revenue, including land sales (RMB80 billion) High: RMB140 billion 8.4 30.6 39.0 89.0 48.8 (debt & liabilities) Low: RMB73 billion 4.4 15.9 20.3 46.3 25.4 (direct debt**) *Assumes 40% are three-‐year loans at 5.5% interest, 30% are five-‐year loans at 6%, 20% are 10-‐year loans at 6.5% and 10% are 20-‐year loans at 7% **Assumes ratio of direct debt over total debt and liabilities for Foshan is similar to national average (see Table 8.2.) Source: FGI analysis Foshan’s estimated RMB25 billion debt repayments in 2013 imply that, under our high scenario (with repayments of RMB39 billion), about RMB14 billion would have had to be refinanced. Foshan officials confirmed in interviews in September 2014 that annual refinancing of a portion of repayments is normal. However, even under our high scenario this should not present a significant problem for the banking sector, since RMB14 billion represents just 2 percent of the city’s RMB711 billion total bank loans in 2013. How does Foshan manage its debt risk? Having analyzed the extent and types of Foshan’s debt, we return to the issue of how the city authorities manage it. We interviewed several officials on the subject in September 2014, after completing most of our other research for the Foshan Story. We did so because we felt that not only could the debt issue be controversial but it was important in understanding China’s growth challenges. The key findings from our interviews and research can be summarized as follows: •
Foshan’s outstanding debt increased rapidly after 2008, when Beijing launched its RMB4 trillion stimulus in response to the global financial crisis. Despite the city’s having total outstanding debt and liabilities of RMB140 billion in 2013 (including guarantees and contingent liabilities), amounting to about 20 percent of its local GDP, it has never defaulted on its debt obligations. Foshan’s relatively strong economy and solid fiscal position have ensured that the authorities have had no trouble fulfilling their recurrent and extra-‐budgetary payment obligations. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 155 •
Foshan’s government debt was incurred mainly through its 48 LGFPs, which could legally borrow from both policy and commercial banks. Under the terms of the stimulus package, these banks were required to provide about half of the funding for major public projects. In 2012, banks financed RMB41 billion worth of Foshan’s LGFP debts, amounting to 44.3 percent of its RMB92.5 billion total outstanding debt (NDRC, 2013). •
A proportion of Foshan’s debt has maturity up to 20 years with relatively low interest rates. According to industry sources, banks were charging about 6 percent annual interest for local-‐government loans in 2014. However, trust companies and other private sources were charging 8-‐12 percent for LGFP loans. A portion of local debt has been under implicit or explicit rollover arrangements, probably with higher rates in subsequent years. In 2013, some 23-‐46 percent of debt-‐service payments may have been refinanced. •
Repayment was financed mainly by land-‐sales revenue. Foshan seems to have an active and prudent plan for managing debt risk. Total debt-‐service payments were limited to about 60 percent of budgetary revenue, or about 30 percent of total revenue (including land sales). Using this rule of thumb, Foshan’s total debt-‐service payments would have been about RMB20 billion in 2012 and RMB25 billion in 2013. •
Given that the local banking sector had total loans of RMB711 billion in 2013, this estimated RMB14 billion refinancing requirement would have amounted to only about 2 percent of the total bank loans. Under normal circumstances, banks should be able to deal with such relatively low levels of additional credit requirement through rollovers and refinancing. •
Recently, Beijing has permitted local governments to issue municipal bonds to replace some LGFP loans, subject to strict approval and monitoring by central and provincial authorities as well as approval by local legislative bodies. This may open fresh opportunities for Foshan to lower its debt-‐servicing costs. At the time of our interviews (2014), officials were confident that residents could buy local debt at much lower rates than the LGFPs were paying to non-‐bank sources. •
Foshan’s ratio of total government debt and liabilities to GDP was 20 percent in 2013, slightly lower than the national average of 22 percent. Given that Foshan is among the most productive cities in China, it is likely that it could manage its repayments and avoid systemic default such as Detroit’s recent bankruptcy. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 156 China’s financial repression as seen from Foshan The above discussion about Foshan’s ability to manage rising local debt is based primarily on debt statistics for the city and China as a whole. Other indicators, including loans/GDP, FAI/GDP, and house prices/income across China’s 16 pioneer cities could contextualize Foshan’s relative financial position. These indicators are presented in Table 8.9. Among these 16 cities, in 2011/2012 Foshan ranked 11th in terms of population, ninth for per capita GDP per capita, eighth for cheapest house prices/income, fourth for lowest FAI/GDP and had the lowest loans/GDP ratio. Table 8.9 | China's 16 high-‐income pioneer cities 2012 Population (m) GDP per capita (USD) 2011 GDP Fixed-‐asset (USD investment/ bn) GDP (%) Loans/GDP (%) Cost of 100sq m of housing/ per capita China 1,354.0 6,166 8,337 70.2 121.3 14.1 Shanghai 23.8 13,702 324 26.0 184.3 15.8 Beijing 20.7 14,040 287 36.1 221.8 17.7 Tianjin 14.1 14,954 207 68.8 118.2 9.2 Guangzhou 12.8 16,998 217 27.7 130.9 10.3 Shenzhen 10.5 19,781 208 17.9 148.6 17.1 Wuhan 10.1 12,757 128 62.9 126.9 8.5 Qingdao 8.9 13,270 117 56.9 102.6 8.7 Hangzhou 8.8 17,937 125 47.7 210.5 11.4 Nanjing 8.2 14,208 116 63.3 162.8 9.5 Ningbo 7.6 18,307 106 44.1 162.2 9.9 Foshan 7.3 14,647 106 32.2 84.9 9.0 Shenyang 7.2 12,917 106 85.5 106.6 7.0 Changsha 7.1 14,429 103 61.8 113.5 6.1 Suzhou 6.5 18,301 193 42.8 106.4 7.9 Wuxi 6.5 18,836 121 47.8 96.2 6.9 Dalian 5.9 16,519 112 80.7 113.1 7.7 % of China 12.3% 30.9% 20.1 37.1 Source: NBS; CEIC; FGI analysis Foshan’s ratio of loans to GDP in 2011 was only 84.9 percent, compared with Beijing’s 221.8 percent, Shanghai’s 184.3 percent, Nanjing’s 162.8 percent, Wuhan’s 126.9 percent and the national average of 121.3 percent. However, its per capita GDP of USD14,647 in 2012 was higher than that of Beijing C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 157 (USD14,040), Shanghai (USD13,702), Nanjing (USD14,208), Wuhan (USD12,757) and the national average (USD6,166). These data confirm Beijing’s misallocation of financial resources, in that Foshan got less credit than cities that were not as productive. The same conclusion can be drawn from a comparison of house price/income data in Table 8.9. This is particularly revealing because it is an indicator of the existence and size of any property bubble. Foshan’s property prices – as measured by the ratio of the cost of 100 square meters of residential property to the local per capita GDP – were relatively low. In 2011, a 100 square meter apartment in Foshan cost about nine times the per capita GDP. The same size apartment in Beijing cost about 17.7 times its per capita GDP; in Shanghai 15.8 times; in Guangzhou 10.3 times; and nationally 14.1 times. In 2012, Foshan’s fixed-‐asset investment was only 32.2 percent of its GDP, compared with 70.2 percent for the national average. All these data point to one insight from our study: Foshan is actually experiencing severe financial repression, especially from the formal financial channels such as loans and fixed-‐
capital investment. Why? The answer is actually straightforward. Foshan has a high concentration of private SMEs, which cannot easily get access to bank loans under the current financial system. One out of every 20 people in Foshan, on average, owns a private small or medium-‐size company. It is truly a city of SMEs. 8.4.5
Conclusion: Tiáo-‐kuài dynamics in China’s financial sector The financial aspect of the Foshan Story highlights again the tiáo-‐kuài relationship discussed in Chapter 2, but in a more complex and comprehensive way than do other factor markets discussed in the previous chapters. The city can do little to change its financial-‐sector conditions, given the overwhelming dominance of the central authorities in setting macro and financial policies. Thus, our discussion here is particularly relevant for understanding recent changes to these policies and their impact on China’s growth. Before discussing the tiáo-‐kuài dynamics in terms of macro and financial policy-‐
making, we look briefly at China’s macro conditions. Data for January 2015 show further signs of a deflating economy. The Consumer Price Index dropped to 0.8 percent; the Producers’ Price Index fell to -‐4.3 percent; exports contracted by 3.3 percent but imports contracted by 19.9 percent, partly due to a large fall in oil prices; and M2 growth slowed to 10.8 percent from 12.2 percent. The currency came under depreciation pressure due to large capital outflows relating to an improving US economy. As industrial-‐profits growth fell to 3.3 percent in 2014, compared with 12.2 percent in 2013, and local government revenue from land sales fell by 37 percent, compared with annual average growth of 24 percent between 2009 and 2013, there is considerable anxiety that the deflationary cycle may be difficult to reverse. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 158 Most worrying is that the deflationary pressure could trigger the sort of localized debt crisis at the corporate and city levels last witnessed in 1997 during the Asian financial crisis. Can China avoid a hard landing? And, if so, how? These questions are important not only for China but the world, given that its contribution to global growth in 2015 is about 27 percent, compared with about 23 percent from the USA (based on the latest International Monetary Fund projections of 6.8 percent GDP growth for China and 3.6 percent for the USA). Understanding the contradictions inherent in China’s dual-‐track economy, using our framework in Chapter 2, may help answer these questions. Micro-‐structural need for exit of failed projects China’s shift towards a market economy is particularly striking in the competition among regions and corporations. Because of kuàikuài competition, SOE profits are dropping much faster than those from SMEs, even though state enterprises continue to enjoy better access to credit. At the same time, the disparities between top-‐tier and lower-‐tier cities are widening as more people, companies and projects move from the latter to former. The larger cities are seeing signs of recovery in both real-‐estate prices and transaction volumes, whereas prices continue to fall in the smaller cities. Ironically, housing is actually more affordable in the bigger, more expensive cities such as Foshan. This is because, although absolute prices are higher, household incomes are relatively even more so. Thus, the average cost of a 100 square meter apartment in first-‐ and second-‐tier cities is about 11 times their average per capita GDP, compared with the national average of 14 times. In other words, the problems of debt-‐affordability have their roots in the overcapacity of SOEs and lower-‐tier cities, which are less productive and competitive within the dual-‐track Chinese economy. This presents Beijing with a key structural challenge. On the one hand, it needs to support the better performing track, comprising the private sector and top-‐
tier cities such as Foshan. At the same time, it needs to eliminate the deadweight of overcapacity in the SOEs and third-‐ and fourth-‐tier cities, especially those with a debt overhang. The central authorities have tried to deal with this divergence in the economy by throwing more money at the laggards and granting them preferential treatment. However, this actually fuels overcapacity and unsustainable local debts. In a market economy, such sunk costs are typically resolved through bankruptcy, which enables all stakeholders to move onto more productive activities. It is difficult for central and local planners to accept that such “exit” mechanisms C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 159 have to be locally executed, project by project and objectively, without the baggage of bureaucratic attempts to rescue or paper over planning mistakes. Despite this, China has successfully managed bankruptcies of SOEs and financial institutions in the past. It is only recently that it has shown reluctance to deal with such structural inefficiencies and provide ample liquidity for more productive parts of the economy. The macro dilemma of fungible credit The dual-‐track nature of the economy presents unique challenges for macro-‐
financial management. Fast-‐growing sectors will increasingly absorb resources such as capital, land and labor, requiring more market-‐oriented measures to guide this process. By contrast, the deadweight of the laggards risks a possible “balance sheet recession”, which may require the injection of huge amounts of credit, low real interest rates and regulatory forbearance to avoid a debt crisis. Since credit is fungible between the two tracks, conventional monetary and macro-‐prudential policies are caught between competing demands. The central bank has attempted to apply differential reserve-‐requirement ratios by sector or type of financial institution to deal with the dilemma. However, the results have been unsatisfactory. For example, when it lowered interest rates in November 2014 in a bid to lower financing costs for enterprises, it triggered instead a speculative boom in the stock market. In response to disappointing macro data in January 2015, it again cut the reserve-‐requirement ratio by a further 50 basis points, with an extra 50 basis points for SME-‐focused banks and 400 basis points for the Agricultural Development Bank of China. The importance of combatting corruption The ongoing anti-‐corruption campaign has enormous public support. However, as we discussed previously (see Chapter 2), such action by central authorities tends to make local officials more risk-‐averse, curtailing experimentation. Thus, as the campaign began to bite in 2014, there was some concern that hampering bureaucratic effectiveness during a crucial reform year was contradictory to the need to revive growth. China’s government budget deficit shrank to 1.8 percent of GDP from 2 percent in 2013 as bureaucratic waste and expenditure fell. Despite longer term payoffs from reforms, this combination of anti-‐corruption institutional reform, cutting overcapacity and dealing with unsustainable local debt had an austerity effect. To counter this and reduce the disruptions to growth momentum, Beijing had to introduce short-‐term stimulus measures such as tax cuts and higher fiscal deficits. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 160 A systemic approach to achieve sustainable growth China faces challenges from corruption, overcapacity, local debt and its diverging dual-‐track economy. But these need to be considered in context. Despite the slowdown, significant parts of the economy continue to expand and the country will still grow much faster than most others. The leadership clearly believes that significant, if difficult, institutional reform is the best strategy at a time when global growth is uncertain and the geopolitical climate is relatively hostile. Measures to combat pollution and energy-‐inefficiency and support healthcare, low-‐cost housing and pensions have widespread public support. Despite concerns about capital outflows, China’s consolidated net foreign asset position of USD1.7 trillion (17.6 per cent of GDP) remains sufficient. No transition from a dual-‐track to a market-‐based economy is painless. China’s leadership sees combatting corruption as a crucial step towards escaping the so-‐
called middle-‐income trap. However, maintaining liquidity through the transition is critical. If China’s most productive cities such as Foshan cannot access sufficient liquidity for productive investment, it is doubtful the other 300 Chinese cities can survive the tight macro-‐economic conditions. In the end, development is a systemic process and sustainable development requires merging the dual tracks and reducing the huge disparities. This is why China needs to maintain relatively stable high growth through sustained reform. Indeed, the global economy depends on it. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 161 9 C O N C L U S I O N The Foshan Story has changed the way we understand China and how we think about the critical challenges the country faces. We hope it has had a similar impact on the reader. We began with three fundamental questions: What is the state? What is the market? And how do the two relate to each other? Our team investigated these questions over three years, largely by focusing on Foshan, one of China’s most reform-‐minded pioneer cities. Understanding what we learned begins by acknowledging that the Chinese state is in flux. It is currently developing institutions to a degree of sophistication enjoyed by most Western countries for decades or even centuries. These institutions evolved in the West in response to specific problems and conditions, many of which China now also faces. Elements of contemporary Chinese debate reflect Enlightenment-‐era discourse. There is a hunger to learn, but there is no reason to believe that China will (or should) settle on the same solutions or, if it does, seek to implement them in the same way. The role of guided internal competition is central to understanding China. Different jurisdictions at equivalent levels compete fiercely, not only for relative position but to build the necessary institutions to enable the country’s transition from a centrally planned to a market-‐centered economy. The motivating force of this competition may be the most fundamental source of China’s economic dynamism. Because it is intrinsically a force of change, we think of it as both the pillar and engine of China’s evolving growth model. Two elements of China’s governance structure motivate the competitive passions of local authorities more than any others. They are the process of promotion within the government and party and the prestige and responsibility of presiding over large and dynamic jurisdictions. Thus, local governments have systematically done everything possible to stimulate economic growth. Local officials have become policy entrepreneurs, simultaneously encouraged and constrained by the risk-‐tolerance and reform commitment of Beijing and the party leadership. The result is a process of push and pull, experimentation and evaluation and positioning and bargaining over policy initiatives and institutional development. This is the nature of China’s reform process and has not changed much over the past 35 years. From an outside perspective, this process can appear to never result in real or substantial reforms. Top-‐level announcements mention little about implementation, local reforms appear insignificant, white papers read like self-‐
congratulatory lists of recent achievements and, when the central government formally enacts a law, it often merely codifies the status quo. However, from a C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 162 Chinese perspective, this is how momentum for reform is maintained, interest groups are sidestepped, political and policy risks minimized and new (or foreign) ideas tried and tested. It is also how the authorities identify competent – and politically acceptable – public-‐sector managers. China has institutionalized momentum for reform through this centrally guided competing regional structure. Indeed, the sustainability of its growth model depends on it. Two related elements focus the competitive energy of local officials on economic dynamism. They are the promotion process within the government and party and the tax base linked to value-‐added activity and land value, over which local officials have substantial influence and on which their success in delivering growth heavily relies. Local officials know that their promotions are determined by the economic performance of their jurisdiction. They apply all the tools at their disposal to support the economy. Here, the strength of our research method and city-‐level focus is apparent because we have been able to observe in detail how a relatively successful Chinese city drove its local economy and the positive and negative consequences. Among these tools, the two most important are market-‐creation (reducing transaction cost), followed by land-‐distribution (establishing property rights). The first of China’s major reforms was the creation of an agricultural market. This is outside the scope of our study, but the result is well-‐known. What ensued was a massive increase in agricultural output and a supply of labor no longer needed on the farms. Next came the creation of urban markets such as those for production, labor, land, capital and transport. Foshan was in the vanguard. Along with other pioneer cities, it competed for growth by importing the DNA of the market economy, spreading the corporate structure into every possible social nook and economic cranny. These cities found ways to turn rural communes that owned single plots of untradeable land into global corporations that deliver enormous industrial output. A surprising implication of this view of China’s growth model is that its policy process is both bottom-‐up and top-‐down. The Foshan Story gives the lie to the commonly held view of China as a top-‐down country, with the central authority dictating almost everything of consequence. Rather, the picture that emerges from our study is more analogous to a vast ship, which the central authorities struggle to steer as it is variously sped forward or slowed by myriad currents in the form of local initiatives and reforms. However, officials at all levels may find their policy options increasingly narrow as market institutions take root and solidify incentives for participants. This is likely to be all the more so at higher levels of government. For example, momentum for the anti-‐corruption campaign is likely to continue because the C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 163 alternative may well be a party with limited or no mandate. Marketization will continue because there are now so many interests vested in it. Rule of law will also continue to be improved because the economy benefits from it. And China will continue to embrace the international order because it is simply not feasible to do otherwise. As the country’s leaders rise through the bureaucratic and party ranks and experience running cities and provinces with large, globally oriented economies, these lessons are internalized. The corporatization of China is an intrinsic part of its transition towards a market economy. A market full of competing corporations is as motivating a force for economic entrepreneurialism as China’s competitive state structure is for policy entrepreneurialism. When the two interact properly, the state enhances the market and ensures that results of competition are socially beneficial. Meanwhile, firms enhance productivity, lowering the transaction and production costs of ever higher standards of living. The result can be astounding. But the state does not always enhance the market or create incentives to ensure that competition motivates long-‐term socially beneficial efforts. Equally, firms do not always compete over productivity. Sometimes, they compete to capture rents. Foshan, where many of China’s reforms began, has alarming levels of reported corruption. The country’s current institutional structure means some effort will be directed to rent-‐seeking and corruption. But competition between jurisdictions also acts as a brake on their extent. Combined with the central government’s constraining role over the system, anti-‐corruption efforts may become a regular test for the top leadership – particularly if they are directed at selective targets. Corruption is not the only adverse outcome of this system. Pollution is a huge problem. It is a major threat to people’s health, crop yields and production and food safety. In many parts of China, pollution quite simply makes life extremely difficult. There are some perverse agglomeration results as every city chases economic growth. So, too, there are social costs when a government has a narrow set of first-‐order priorities that do not adequately take into account the long-‐term happiness of its constituents. 9.1
NEW T HINKING O N K EY CHALLENGES FOR CHINA How does this understanding of the state, the market and how they interact change the way we think about some of the key challenges facing China? 9.1.1
Local-‐government debt for sustainable development Public debt is as much of a challenge for Foshan, as it is for the country as a whole. Local-‐government debt is closely related to infrastructure financing and the now-‐ubiquitous LGFPs. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 164 According to our analysis, Foshan’s government-‐debt servicing payments are very high by international standards and are mostly financed by land sales. However, the authorities have been monitoring this very closely, restraining the cost of debt to about 30 percent of total revenue, including land sales. Given Foshan’s strong economy and rising fiscal revenue, we estimate that the debt service is manageable. But cities in less favorable locations than Foshan and with more SOEs may face serious challenges. The role and use of land in China’s economy and the value of property is another frequently raised concern, partly because of the exposure of leveraged land finance and partly because of social tensions related to housing affordability. If land values fall, the implications for heavily leveraged cities reliant on land financing to service debt could be problematic. This risk is one reason the central government is cautious about liberalizing interest rates and capital markets too quickly. It worries that money kept in property may flow to other assets, leaving property markets with a much lower equilibrium price and local governments with huge solvency problems. A large share of public debt comes from funding infrastructure projects, especially since 2008. There is clearly scope for further development of Foshan’s infrastructure (see our discussions about electricity shortages, sewage bottlenecks and unconnected districts in Chapter 7). However, it will be important for the government to focus on projects that are economically and commercially viable. That will require better cost-‐benefit analyses and feasibility studies. Securing finance for economically and commercially viable projects should not be challenging and debt could be financed by cashflow or other related revenue. Given the government structure discussed throughout the report, ensuring such projects are insulated from unhelpful political influence will also be important. Transparency and information-‐sharing about viability studies will help. People often blame LGFPs for raising debt levels. However, despite their government-‐appointed senior management, these entities are corporations. And corporations create many institutional benefits, including facilitating contracts between legal entities. The very institution that historically has provided the West with a fundamental advantage has now become a huge asset for China, despite some challenges as their operations and governance structures continue to evolve. 9.1.2
Land: The dual-‐track issues Land is associated with many of China’s most pressing challenges, especially corruption, the rule of law and debt. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 165 Because local governments have authority to reassign land-‐use rights, property is a source of corruption. Disputes between local people and authorities over compensation and acquisition are among the most common such problems throughout the country and, thus, a major concern for the central government. In response, the Third Plenum in 2013 laid down a number of recommendations, most of which Foshan had already introduced. For example, land-‐use rights are already tradable and schemes already exist to increase land value by reassigning its use to allow more-‐productive activities (similar to rezoning). Foshan’s active land market is a key reason for its development. However, many of the policies the city has implemented have not yet been fully legitimized, leaving a large informal land market in Foshan. Defining property rights to allow more efficient use is a challenge that the market in Foshan has largely resolved. However, central institutions have so far been unable to extend land reform to the rest of China. The hukou system, which is associated with land reform, is often highlighted as one of China’s main problems. However, the issue is really one of property rights, since it revolves around entitlements for rural hukou-‐holders. Under the existing system, they are usually required to forfeit their property rights in exchange for an urban hukou that entitles them to better public services in the cities. The absence of private land-‐ownership is often seen as another key problem, especially by Western observers, for whom it is an inalienable right. However, China is already on the way to developing a workable land-‐use system that supports growth. Again, Foshan has been in the vanguard. Since ownership itself is simply a particular bundle of rights, it is ideologically and practically possible to provide most of these to an individual or a firm without endowing the title of ownership. This is roughly the system China has developed. However, the continued ownership of land by the state or local collectives grants them certain rights to develop projects such as the industrial parks that are intended to push China up the value chain. Whether this capacity is net positive is difficult to ascertain, but its role in China’s development has been substantial. In our view, more critical than ownership are institutions that clearly define property rights, facilitate trade at low cost and ensure fair and efficient resolution of disputes. 9.1.3
Social policy and the environment Social policies are a major concern for China. We focus on those that have a direct economic bearing. It is often assumed that China invests in top-‐level educational institutions to compete against the likes Harvard, MIT and Oxbridge at the national level. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 166 However, the Foshan Story shows that markets demand more vocational education at local levels. Investors prize skills that are relevant to prevailing economic conditions. For the most part, China’s university graduates quite simply lack the skills that are relevant to the job markets in which they live. In Foshan, half the population is from outside the city. We see this as evidence that locals consider the authorities to be relatively successful in providing the public services, job opportunities and lifestyles they want. Jobs, homes and social services are high on the list of priorities. Foshan moved relatively early to provide social services, irrespective of hukou status, giving the city a significant edge in attracting workers. It means that they have access to the likes of housing, healthcare and free public schools for their children, as well as being able to live near where they work. Migrant workers now account for about half the city’s population of more than seven million and have contributed tremendously to its economic development during the past 35-‐odd years. Our research shows that, administratively, people’s social benefits can be disconnected from the hukou system and transferred to where they live. However, current fiscal arrangements act as a barrier to wider adoption. This is because it leaves most social services-‐related funds in the hands of the central government. As these may not be supplemented externally, even rich cities often lack enabling policies and the financial resources to provide equitable social services to migrants. This policy framework was introduced to ensure a minimum level of services for a wider section of China’s population, but it must be complimented by regionally competitive components. The cost of providing such services, where possible, should be weighed against the potential upside, which includes making a city such as Foshan more attractive to the skilled workers it needs to help upgrade industry and create innovative local businesses. There is also a potential political advantage, given the central government’s call for a “new urbanization” that focuses on people, rather than simply constructing lots of big buildings. Successfully implementing Beijing’s visions is a reliable path to success for any official. Foshan’s leaders can take comfort from a July 2014 decree that hukou reform will abolish the rural-‐urban distinction. After all, the city introduced such a policy years earlier. Extensive industrialization brought severe pollution to Foshan and put enormous pressure on its energy and water supplies. Pollution threatens environmental sustainability and people’s health. It also risks hampering the city’s ability to successfully compete for talented and skilled workers and, thus, challenges its long-‐term development prospects. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 167 Pollution costs include not only the impact on development. The threat to public health also has an economic impact, but the human and social impacts are far more important. In recent years, Foshan has recorded the worst air quality in the Pearl River Delta. The industrial waste it discharges into its waterways is also a major risk. Indeed, local grain and vegetable production has already been hard hit because many people refuse to buy products harvested in Foshan. Buying more expensive, imported food and installing air and water purifiers increase residents’ living expenses, offer only limited improvements to their quality of life and encourage thoughts of relocating. 9.1.4
Small and medium-‐size enterprises Foshan’s economic geography and business environment make it attractive to many firms, especially SMEs. However, whereas advantages such as these improve its economic prospects, it also faces challenges due to the likes of a scarcity of funding and skills needed to transition to a more modern economy. SME contributions to society are widely proclaimed, but developing vibrant enterprises is difficult. Foshan data confirm that most SMEs cannot get bank loans, forcing them to turn to shadow banking, with its higher rates. In response to concerns about issues such as overcapacity, ghost towns and local-‐government debts, Beijing tightens national credit availability. However, such problems are location-‐specific. Many parts of China, such as Foshan, are not drowning in bad investments. Rather, they are being starved of credit. SMEs are the pillar of Foshan’s economy. Between 2001 and 2011, taxes from private enterprises (most of which are SMEs) as a share of total business taxes increased from an already high 81.6 percent to an astounding 94.8 percent. Faced with tight liquidity, banks naturally prefer to lend to SOEs and large enterprises with strong government connections and credit profiles. The typical size of such loans also means lower transaction costs for the banks. Meanwhile, Foshan’s enterprises are struggling to upgrade and, thus, need capital. However, most operate on thin profit margins and bank-‐loan transaction costs for this market segment are high. According to an NDRC paper, the interest rate on SME loans is usually more than 1.3 times the benchmark set by the central bank. 9.1.5
Sustaining growth There is great concern about the sustainability of China’s growth model for a variety of reasons. Household consumption as a share of GDP, for example, is low by comparison with other countries – even in terms of their historical equivalent to China’s current stage of development. The corollary of this is that China invests a relatively high share of its GDP. Similarly, on the production side, China’s services sector appears relatively small as a share of GDP. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 168 Foshan faces some significant difficulties in developing its tertiary industry – primarily in terms of its proximity to Guangzhou and Shenzhen. With Guangzhou now only 45 minutes away by metro and Shenzhen only 90 minutes by rail, many firms that might otherwise have set up or stayed in Foshan prefer these cities. This is particularly so in the financial sector, which is a key segment of the services industry in most economies. Given that Guangzhou is the provincial capital, most financial institutions will base themselves there over Foshan. Similarly, those that need to work closely with the Hong Kong or even Macau markets are more likely to choose nearby Shenzhen. Thus, Foshan’s financial institutions face fierce competition and few business opportunities. Finally, Foshan’s industrial structure is not as advanced as those of Guangzhou or Shenzhen. Its industry is much more labor-‐intensive and its firms are typically SMEs, rather than large corporations. As such, they usually do not require require high-‐end financial, legal or logistics services. How significant a concern is this? Our research suggests that the distinction between goods and services is arbitrary and misleading. Depending on the measurement, all value-‐added activities can be described as services. There is no intrinsic reason to prefer services-‐sector activity as commonly defined over any other. More important is to focus on what can be done competitively, according to comparative advantage. If the authorities force a shift to services against underlying local economic foundations, the result is likely to be wasted money and failed enterprises. The dynamics of tiáo-‐kuài relations create political pressure for an increase in the services share of the economy. It is possible to respond to this by focusing on services in the value chain that are currently categorized as manufacturing. Facilitating market-‐driven industrial upgrading based on local comparative advantage and a refined view of value chains is a more market-‐oriented solution that will create less waste and more opportunity and value. 9.2
NEW T HINKING R AISES N EW ISSUES Understanding China’s economy in terms of dynamic interactions between a consistently reformist state in the process of installing market-‐economy institutions and an increasingly talented, creative and expanding market raises a new set of questions about the country’s future. 9.2.1
The importance of geography and competition among regions China’s new “silk roads” are an acknowledgement of the importance of economic geography. Market-‐determined economic geography is vastly different to a politically determined one. Because China is undergoing a process of institutional evolution, the market plays a stronger role in some sectors than C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 169 others. Consequently, capital can respond to political incentives while the anticipated users of an investment respond to market incentives. This institutional mismatch is fertile ground for creating stranded assets. However, such a circumstance should not be cause for excessive pessimism. It is an almost inevitable consequence of institutional evolution. The more quickly China’s lagging institutions catch up to the rest of the economy’s transition, the shorter will be the period of misallocated effort and investment. In a market economy, where people and capital are free to “vote with their feet”, it makes little sense for local governments to compete for the same targets. For example, cities in Guizhou Province, to the northwest of Guangdong, cannot compete as urban metropolises with large manufacturing output because their geography dictates such a strategy will fail. Market forces mean a number of Chinese cities are starting to draw level with some of the world’s best. However, every city is unique. China’s metropolises and megatropolises will best succeed by finding their niche, developing their own identities and increasing their competitiveness in a market environment. 9.2.2
Macro-‐policy response to structural issues Should China continue using macro-‐policy tools to deal with structural problems such as housing prices if its diverse local economies respond differently – and sometimes diametrically so? Given the different impacts of macro policies at local levels, how should central policymakers act? 9.2.3
Integration versus competition The dilemma of whether to pursue integration or competition is a significant one for Foshan, even as it takes part in the massive Pearl River Delta regional amalgamation. We have focused on the competition between cities, but integration is based on an attempt to compete at a higher level. This will significantly affect the growth of Foshan’s tertiary industry. 9.3
FINAL COMMENT Outsiders tend to focus on China’s central government, which can be mistaken for a controlling behemoth. Beijing is strong, but much of its efforts are directed towards resolving conflicts between the country’s competing local governments. Successfully resolving these problems can deliver big gains. However, sometimes the “solutions” create fresh challenges. The Foshan Story provides an opportunity to see how China’s central and local governments and its expanding markets all work together. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 170 In embracing the global market, China has introduced core institutions that have successfully driven economic development in the West. However, it has not embraced the core institutions of liberal democracy. Instead, it has tried to find its own ways to solve many of the same problems that liberal democracy is designed to address. Modernization does not require imitating the appearance of Western institutions. Many Chinese cities are starting to match other great cities around the world in terms of lifestyle and business practice, despite the centralized political system at the national level. We have attempted to set out a new framework for understanding China, largely by focusing on one of its most dynamic cities. The Foshan Story has changed the way we see China’s economy, government, politics and society, and changed the way we understand governance and economics itself. This report closes one chapter of our research on China’s evolving growth model. We hope to receive your spirited responses that will no doubt help us correct mistakes made and refine lessons learned as we continue in our attempt to discover more about the workings of China and the profound implications of this country’s evolving model of growth. Clearly, this is not the end of the Foshan Story. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 171 B I B L I O G R A P H Y 佛山新城建设管理委员会. (2013). 佛山新城画册. 佛山, 中国: 佛山日报社.
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l. C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 178 A P P E N D I X A : D A T A U S E D T O P R O D U C E F I G U R E S Data for Figure 3.1 | Sixteen “super” cities’ share of China’s GDP (2012) Changsha 1.23 Hangzhou 1.50 Shenyang 1.27 Wuhan 1.54 Ningbo 1.27 Suzhou 2.31 Foshan 1.27 Tianjin 2.48 Dalian 1.35 Shenzhen 2.49 Nanjing 1.39 Guangzhou 2.61 Qingdao 1.41 Beijing 3.44 Wuxi 1.46 Shanghai 3.89 Other 69.09 Source: CEIC Data for Figure 3.2 | Foshan’s real-‐ and nominal-‐GDP growth & trends (1979-‐2013) (Percent) Nominal GDP Index Nominal GDP Index 1979 9 9 1997 15 17 1980 19 15 1998 9 15 1981 25 15 1999 8 10 1982 15 14 2000 16 13 1983 16 16 2001 13 13 1984 24 21 2002 12 13 1985 38 27 2003 19 17 1986 17 11 2004 22 18 1987 22 16 2005 27 19 1988 46 20 2006 23 19 1989 10 1 2007 23 19 1990 23 17 2008 20 15 1991 30 29 2009 10 14 1992 42 39 2010 17 14 1993 39 27 2011 10 11 1994 26 17 2012 7 8 1995 27 24 2013 6 10 1996 18 18 Source: Foshan Statistical Yearbook 2010-‐2012 and Foshan Annual Report on Economic and Social Development (2013) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 179 Data for Figure 3.3 | Foshan’s GDP by expenditure (1996-‐2011) (percent of total final expenditure) Net Export Household Government Consumption Consumption Fixed Inventories Capital Formation 1996 4 41 10 16 30 1997 15 36 10 15 25 1998 13 35 10 18 24 1999 14 36 10 16 24 2000 16 35 11 15 24 2001 22 32 12 9 24 2002 22 31 14 7 26 2003 22 27 14 6 32 2004 21 24 14 7 35 2005 22 33 9 3 33 2006 14 31 9 12 34 2007 24 32 5 4 35 2008 34 27 5 3 32 2009 35 28 8 2 27 2010 29 31 8 3 29 9 4 30 2011 27 31 Source: Foshan statistical yearbooks 1999-‐2012 Data for Figure 3.4 | Foshan government consumption by value and share of GDP (1996-‐2010) Expenditure (100 Percent of million RMB) Foshan GDP Expenditure (100 Percent of million RMB) Foshan GDP 1996 63.5 10 2004 236.7 14 1997 69.6 10 2005 218.9 9 1998 73.2 10 2006 251.7 9 1999 82.5 10 2007 191.2 5 2000 102.3 11 2008 216.0 8 2001 131.1 12 2009 370.2 8 2002 170.4 14 2010 466.2 9 2003 191.2 14 Source: Guangdong statistical yearbook C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 180 Data for Figure 3.5 | Foshan government consumption YoY growth (1997-‐
2010) Year Consumption Year (y.o.y. growth rate) Consumption (y.o.y. growth rate) 1997 10 2004 24 1998 5 2005 -‐8 1999 13 2006 15 2000 24 2007 -‐24 2001 28 2008 13 2002 30 2009 71 2003 12 2010 Source: Guangdong statistical yearbook (1997-‐2011) 26 Data for Figure 3.6 | Ratio of exports to industrial output (Foshan 2000-‐
2010) Year Goods as share of industrial output (%) Year Goods as share of industrial output (%) 2000 30 2006 27 2001 30 2007 24 2002 32 2008 19 2003 33 2009 14 2004 34 2010 15 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 181 2005 29 Source: CEIC and Foshan Statistical Yearbook (1999-‐2012) Data for Figure 3.7 | Foshan net exports of goods and services as share of GDP (1996-‐2011) Ex of Goods/ NX of Goods/ NX of GDP GDP Services/GDP 4 1997 15 53 19 -‐4 1998 13 47 18 -‐5 1999 14 43 8 6 2000 16 50 10 6 2001 22 49 13 9 2002 22 56 20 2 2003 22 61 24 -‐2 2004 21 69 30 -‐9 2005 22 59 29 -‐7 2006 14 58 31 -‐17 2007 24 55 31 -‐7 2008 34 46 25 9 2009 35 35 15 20 2010 29 40 17 12 % NX/GDP 1996 27 41 18 9 2011 Source: Guangdong Statistical Yearbook (1997-‐2012) and Foshan statistical yearbooks (1999-‐2012) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 182 Data for Figure 3.8 | Foshan's GDP by industrial sector (1978-‐2011) % Primary Secondary Tertiary Primary Secondary Tertiary 1978 31 50 18 1995 9 56 35 1979 31 49 19 1996 9 55 36 1980 29 53 18 1997 9 55 37 1981 27 55 18 1998 8 53 39 1982 25 55 19 1999 7 52 40 1983 27 53 21 2000 6 53 41 1984 24 55 21 2001 5 53 42 1985 21 55 23 2002 5 53 42 1986 20 56 24 2003 5 55 41 1987 17 59 25 2004 4 57 39 1988 17 60 23 2005 3 61 36 1989 17 57 26 2006 3 63 35 1990 15 57 29 2007 2 63 35 1991 12 60 28 2008 2 64 34 1992 10 60 30 2009 2 63 35 1993 9 57 34 2010 2 63 35 1994 9 56 34 2011 2 Source: Guangdong Statistical Yearbook and China Statistical Yearbook 62 36 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 183 Data for Figure 3.9 | Guangzhou’s GDP by industrial sector (1978-‐2012) % Primary Secondary Tertiary Primary Secondary Tertiary 1978 12 59 30 1996 6 46 49 1979 11 55 34 1997 5 45 50 1980 11 55 35 1998 5 43 52 1981 10 57 33 1999 4 44 52 1982 12 56 32 2000 4 41 55 1983 11 57 32 2001 3 39 57 1984 10 52 37 2002 3 38 59 1985 10 53 37 2003 3 40 58 1986 9 50 40 2004 3 40 57 1987 9 46 45 2005 3 40 58 1988 9 48 43 2006 2 40 58 1989 8 45 47 2007 2 40 58 1990 8 43 49 2008 2 39 59 1991 7 47 46 2009 2 37 61 1992 7 47 46 2010 2 37 61 1993 6 47 46 2011 2 37 62 1994 6 46 48 2012 2 35 64 1995 6 46 48 Source: Guangdong Statistical Yearbook and China Statistical Yearbook C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 184 Data for Figure 3.10 | Shenzhen’s GDP by industrial sector (1979-‐2012) % Primary Secondary Tertiary Primary Secondary Tertiary 1979 37 20 43 1996 1 48 50 1980 29 26 45 1997 1 48 51 1981 27 32 41 1998 1 48 51 1982 23 38 39 1999 1 50 49 1983 17 43 40 2000 1 50 50 1984 11 46 43 2001 1 50 50 1985 7 42 51 2002 1 49 50 1986 8 39 53 2003 0 51 49 1987 8 39 52 2004 0 52 48 1988 7 41 52 2005 0 53 46 1989 6 44 50 2006 0 53 47 1990 4 45 51 2007 0 50 50 1991 3 48 49 2008 0 50 50 1992 3 48 49 2009 0 47 53 1993 2 53 44 2010 0 47 53 1994 2 53 45 2011 0 46 54 1995 1 50 48 2012 0 Source: Guangdong Statistical Yearbook and China Statistical Yearbook 44 56 Data for Figure 3.11 | Ratio of utilized FDI to GDP in Foshan (1996-‐2013) (Percent) 1996 15 2005 3 1997 13 2006 3 1998 12 2007 3 1999 12 2008 3 2000 8 2009 3 2001 7 2010 2 2002 7 2011 2 2003 7 2012 2 2004 Source: CEIC and FGI analysis 9 2013 2 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 185 Data for Figure 3.12 | Foshan industrial-‐output share by enterprise (2000-‐
2011) Foreign HMT Foreign Invested Invested 2006 25 13 9 2007 24 12 34 8 2008 23 14 2003 32 9 2009 20 12 2004 27 13 2010 19 13 2005 27 12 Source: Foshan Statistical Yearbook (2002-‐2012) 2011 19 15 % HMT Invested 2000 33 11 2001 32 2002 Invested Data for Figure 3.13 | Foshan tax contribution by enterprise (2001-‐2011) Foreign HMT Foreign Invested Invested 2007 18 13 8 2008 17 14 17 10 2009 17 12 2004 18 13 2010 16 16 2005 20 16 2011 18 16 2006 17 14 Source: Foshan Statistical Yearbook (2002-‐2012) % HMT Invested 2001 30 9 2002 25 2003 Invested Data for Figure 3.14 | Foshan profit contribution by enterprise (2001-‐
2011) Foreign HMT Foreign Invested Invested 2007 2.2 1.8 0.9 2008 2.3 1.9 1.0 1.3 2009 2.6 2.1 2004 0.8 1.3 2010 3.7 3.2 2005 1.2 1.4 2011 3.4 2.5 2006 1.4 1.5 Source: Foshan Statistical Yearbook (2002-‐2012) % HMT Invested 2001 1.2 0.6 2002 1.7 2003 Invested C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 186 Data for Figure 4.1 | Gross industrial output: Foshan, Guangzhou, Shenzhen and China average (1996-‐2010) Prefecture Level Billion RMB Foshan Guangzhou Shenzhen 1996 91 163 121 22 1997 99 181 139 23 1999 129 233 204 24 2000 156 257 257 29 2001 178 283 308 33 2002 204 318 363 38 2003 258 402 525 49 2004 333 504 651 65 2005 478 603 957 87 2006 629 728 1,193 109 2007 842 891 1,383 139 2008 1,067 1,163 1,586 172 2009 1,178 1,138 1,542 189 2010 1,453 1,383 Source: Guangdong Statistical Yearbook (1997-‐2011) 1,853 241 City-‐Average Data for Figure 4.2 | ‘Specialized towns' share of Guangdong cities’ GDP (2009) Guangzhou 3.18 Shanwei 37.05 Shaoguan 5.89 Dongguan 38.67 Zhuhai 15.24 Meizhou 42.59 Zhanjiang 16.7 Zhongshan 54.98 Yangjiang 20.12 Shantou 55.35 Zhaoqing 21.69 Jiangmen 56.08 Maoming 21.74 Yunfu 62.14 Huizhou 23.37 Chaozhou 64.19 Qingyuan 31.16 Jieyang 67.22 Heyuan 34.44 Foshan 82.42 Source: Nanfangwang (2011) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 187 Data for Figure 5.1 | Land use in Foshan % Agriculture Construction Other 1996 75.1 20.8 4.1 2005 59.5 30.8 9.7 Source: 佛山市土地利用总体规划 1997 － 2010 (Foshan overall planning of land use) Data for Figure 5.2 | Sources of Foshan’s wealth growth (2005-‐2010) Thousand Property value Deposit per Disposable RMB per capita capita income 2005 71 67 18 42 2006 141 74 19 50 2007 149 78 21 59 2008 152 87 22 68 2009 240 105 25 72 2010 303 Source: CEIC data, FGI analysis. 118 27 80 GDP per capita Data for Figure 7.1 | Electricity generation in Foshan (1978-‐2011) (MWh) 1978 20 1995 400 1979 20 1996 490 1980 20 1997 610 1981 20 1998 730 1982 20 1999 800 1983 20 2000 900 1984 20 2001 1010 1985 20 2002 1100 1986 50 2003 1180 1987 80 2004 1270 1988 100 2005 1210 1989 140 2006 1020 1990 180 2007 920 1991 190 2008 720 1992 220 2009 820 1993 320 2010 1200 450 2011 1440 1994 Source: NDRC (2013) C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 188 Data for Figure 7.2 | Electricity consumption by city and province (2005-‐
2010) (kWh / Provincial million RMB) level Foshan Dongguan Guangzhou Shenzhen 2005 1.2 1.3 1.7 0.8 0.9 2006 1.2 1.2 1.6 0.8 0.8 2007 1.2 1.2 1.5 0.8 0.8 2008 1.1 1.0 1.5 0.7 0.8 2009 1.0 0.9 1.3 0.7 0.7 2010 1.0 0.9 Source: China Statistical Yearbook (2006-‐2011) 1.4 0.6 0.7 Data for Figure 8.1 | Deposits relative to GDP in Foshan and China (2003-‐
2012) % Foshan China 2003 213 153 2004 197 151 2005 161 155 2006 152 155 2007 133 146 2008 131 148 2009 150 175 2010 150 179 2011 147 171 2012 152 177 Source: Foshan Statistical Yearbook (2004-‐2013) and NBS C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 189 Data for Figure 8.2 | Loans relative to GDP in Foshan and China (2003-‐
2012) % Foshan China 2003 143 117 2004 123 111 2005 87 105 2006 83 104 2007 77 98 2008 69 97 2009 85 117 2010 86 119 2011 90 116 97 121 2012 Source: Foshan Statistical Yearbook (2004-‐2013) and NBS C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 190 Data for Figure 8.3 | Foshan bank deposits by source (1984-‐2010) RMB Urban and Rural Savings Deposits Corporate deposits Other Deposits Public Institutions' Deposits Agricultural Deposits 1984 61,985 111,818 39,477 1985 84,461 99,835 7,115 81,480 1986 130,181 155,403 10,653 115,470 1987 204,145 212,640 15,369 146,218 1988 204,085 234,729 17,355 10,448 136,846 1989 313,424 252,111 21,796 15,332 160,714 1990 1,060,703 295,171 42,434 11,819 147,752 1991 1,441,298 381,782 114,401 15,466 186,183 1992 2,006,025 970,687 45,322 16,947 261,083 1993 2,672,888 1,040,414 120,753 26,731 134,718 1994 3,525,872 1,961,517 34,798 14,818 20,764 1995 4,844,980 2,073,358 45,639 14,586 493,222 1996 6,788,278 2,802,559 58,697 11,028 523,959 1997 8,532,523 3,216,567 44,511 15,502 659,592 1998 10,688,707 3,681,092 119,584 26,011 966,236 1999 11,955,035 4,289,827 228,398 42,761 1,291,571 2000 12,169,839 5,175,453 444,024 76,991 1,537,575 2001 13,308,337 5,749,924 619,718 88,678 1,610,646 2002 15,359,256 5,970,889 817,323 291,176 1,726,099 2003 17,839,931 7,872,486 504,981 2,020,089 2004 20,288,137 7,876,579 1,258,162 683,973 2,259,360 2005 23,587,776 8,588,035 1,400,563 668,053 2,524,574 2006 26,670,579 9,717,033 1,854,961 781,986 2,956,011 2007 27,688,056 10,955,401 2,446,942 1,111,752 3,601,902 2008 34,360,999 12,127,980 3,194,145 1,189,829 3,485,406 2009 38,853,287 18,589,485 3,475,927 1,907,651 4,709,810 2010 44,079,198 19,626,440 5,046,179 4,323,851 5,895,866 Million Source: Foshan Statistical Yearbook, 2001-‐2010, 7,165,968 佛山市志 1 984-‐2000 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 191 Data for Figure 8.4 | Short-‐term versus long-‐term loans in Foshan (1984-‐
2010) Short Term Long Term Short Term Long Term 1984 5.41378 0.3431 1998 114.9269 6.38691 1985 5.98457 0.49376 1999 127.07712 7.89708 1986 7.80227 0.6006 2000 125.42363 13.63795 1987 10.03932 0.673 2001 120.44948 28.78734 1988 9.43269 0.68772 2002 119.31248 31.45258 1989 10.23301 0.74106 2003 118.59825 58.80383 1990 17.97335 1.48676 2004 113.672 68.84841 1991 19.92493 2.13733 2005 108.14278 80.89726 1992 25.97497 3.43175 2006 113.90838 99.12619 1993 32.52022 3.86542 2007 132.76166 119.26837 1994 41.1975 4.84383 2008 133.82908 133.58327 1995 57.18275 4.58883 2009 154.13796 216.34067 1996 71.10994 4.72607 2010 153.3774 306.39441 5.39412 1997 94.90632 Note: units are billions of RMB Source: Foshan Statistical Yearbook 2001-‐2010 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 192 Data for Figure 8.5 | Distribution of short-‐term loans in Foshan (1984-‐
2009) Foreign Private Invested Sector & TVEs Others Industry Commerce Enterprises Individuals Construction Agriculture 1984 0.00 0.46 1.71 3.25 0.00 0.00 0.00 0.00 1985 0.00 0.20 1.94 3.29 0.00 0.00 0.06 0.50 1986 0.00 0.25 2.59 4.13 0.00 0.00 0.08 0.74 1987 0.00 0.36 3.63 5.07 0.00 0.00 0.19 0.78 1988 0.60 0.32 3.33 4.74 0.00 0.00 0.35 0.09 1989 0.64 0.39 3.66 5.13 0.00 0.00 0.28 0.13 1990 0.69 6.82 5.43 4.53 0.00 0.00 0.30 0.19 1991 0.73 2.10 9.38 6.27 0.00 0.01 0.33 0.64 1992 0.80 4.58 10.91 8.21 0.65 0.01 0.49 0.32 1993 1.09 5.39 13.11 11.15 0.08 0.01 0.62 1.06 1994 11.51 9.86 8.96 8.63 0.64 0.06 0.66 0.88 1995 16.05 16.15 11.21 10.19 0.80 0.01 1.03 1.71 1996 23.95 15.37 13.87 12.49 1.01 0.01 0.97 3.44 1997 21.62 33.54 17.79 14.36 1.34 0.19 2.17 3.89 1998 38.00 23.80 23.30 18.80 1.98 0.03 1.84 6.91 1999 43.02 31.04 25.08 16.79 2.45 0.84 0.97 6.89 2000 40.27 32.88 25.97 14.69 3.42 1.49 1.16 5.53 2001 38.54 22.46 29.68 16.34 5.59 2.29 1.41 4.14 2002 36.36 22.94 30.10 16.02 5.73 2.74 1.35 4.07 2003 37.59 21.11 29.09 16.89 5.90 2.99 1.33 3.70 2004 39.38 22.96 27.80 11.00 4.37 3.54 1.18 3.44 2005 37.45 23.62 24.61 10.62 3.29 4.13 1.55 2.86 2006 35.85 28.74 31.31 10.94 1.85 2.23 1.18 1.81 2007 42.82 32.43 36.61 14.39 1.80 2.50 0.78 1.43 2008 51.12 29.57 34.25 12.84 1.84 2.51 0.64 1.06 2009 58.33 32.08 33.12 22.18 1.82 4.20 1.03 1.38 Note: units are billions of RMB Source: Foshan Statistical Yearbook 2001-‐2010, 佛山市志 1984-‐2000 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 193 Data for Figure 8.7 | Sources of fixed-‐asset investment in Foshan by value (2000-‐2011) Billion Self Other Domestic RMB financing financing loans 2000 9.05 4.46 3.77 2001 11.01 6.71 2002 14.84 2003 Utlizied State budget Bonds 1.43 0.07 0.00 5.58 1.21 0.03 0.00 7.11 4.96 2.28 0.35 0.03 24.34 10.41 8.41 2.42 0.04 0.03 2004 36.43 14.34 11.57 3.38 0.08 0.00 2005 48.59 17.65 13.33 4.76 0.05 0.00 2006 59.60 23.04 16.84 5.34 0.11 0.02 2007 72.34 32.49 13.61 8.57 0.37 0.02 2008 89.83 22.96 4.25 7.32 10.98 0.00 2009 110.16 42.63 26.71 7.09 0.85 0.00 2010 132.97 45.31 32.44 5.93 0.46 0.01 2011 148.41 59.56 27.73 4.70 0.27 0.00 foreign capital Source: Foshan statistical yearbooks 各区全社会固定资产投资资金来源 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 194 Data for Figure 8.8 | Sources of fixed-‐asset investment in Foshan (2000-‐
2011) Self Other Domestic financing financing loans 2000 48.17 23.75 20.07 2001 44.84 27.34 2002 50.20 2003 Utlizied State budget Bonds 7.62 0.37 0.02 22.75 4.94 0.11 0.02 24.04 16.79 7.71 1.17 0.09 53.32 22.80 18.43 5.30 0.09 0.06 2004 55.36 21.79 17.59 5.13 0.12 0.00 2005 57.59 20.91 15.80 5.64 0.06 0.00 2006 56.79 21.95 16.05 5.09 0.11 0.02 2007 56.78 25.50 10.69 6.72 0.29 0.02 2008 66.37 16.97 3.14 5.41 8.11 0.00 2009 58.77 22.74 14.25 3.78 0.46 0.00 2010 61.24 20.87 14.94 2.73 0.21 0.00 2011 61.66 24.75 Source: Foshan statistical yearbooks 11.52 1.95 0.11 0.00 Percent foreign capital Data for Figure 8.9 | Investment in fixed assets as a share of GDP (2003-‐
2012) Percent Foshan China 2003 30.67 31.40 2004 34.32 36.67 2005 30.52 40.61 2006 30.57 43.21 2007 28.75 44.17 2008 28.75 47.18 2009 30.50 56.95 2010 30.43 60.13 2011 31.14 63.82 2012 31.72 70.30 Source: Foshan Statistical Yearbook (2004-‐2013) and NBS C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 195 Data for Figure 8.10 | Investment in real estate as a share of GDP (2003-‐
2012) Percent Foshan China 2003 0.064 2004 0.058 0.091 2005 0.059 0.095 2006 0.062 0.099 2007 0.093 0.107 2008 0.092 0.112 2009 0.074 0.126 2010 0.086 0.143 2011 0.096 0.160 2012 0.095 0.178 Source: Foshan Statistical Yearbook (2004-‐2013) and NBS Data for Figure 8.12 | Contribution to Foshan’s GDP by industrial-‐
enterprise size (1998 and 2010) Billion RMB 1998 2010 Large 1.189751 9.2634362 Enterprises Medium 0.354232 12.064367 Enterprises Small 1.321924 Source: F
oshan S
tatistical Y
earbook 1999, 2011 Enterprises 17.7253154 Data for Figure 8.13 | Contribution to Foshan’s total industrial employment by industrial-‐enterprise size (1998 and 2010) Thousand 1998 2010 Large 137,118 413,643 Enterprises Medium 86,862 611,345 People Enterprises Small 40,613 Source: F
oshan S
tatistical Y
earbook 1999 and 2011 Enterprises 788,227 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 196 Data for Figure 8.14 | Non-‐performing loan ratios of Foshan firms by size Foshan NPL ratios (%) Large 0.25 Medium 1.25 Small 1.09 Micro Source: Tan (2012) 2.6 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 197 A P P E N D I X B : A D D I T I O N A L T A B L E S A N D F I G U R E S Percent Figure B.1 | Net Export's Contribution to GDP 60 50 40 30 20 Shenzhen Foshan Nanjing Chengdu Dongguan Wenzhou 2012 2011 2010 2009 2008 2007 2006 2005 0 2004 10 Source: CEIC Figure B.2 | NPL Ratios of Corporations in Foshan Source: CEIC data, FGI analysis C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 198 Figure B.3 | Foshan Automobiles for Civil Use 2 000-‐2010 Source: Foshan Statistical Yearbook 2001-‐2011 Figure B.4 | Number of Industrial Companies by Origin in Select Cities Notes: Only companies with total annual revenue exceeding RMB 20 million are included DF = Domestically Financed, HMT = Hong Kong, Macau or Taiwan Financed, FF = Foreign Financed Source: CEIC. FGI Analysis C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 199 Figure B.5 | Foshan Electricity Consumption and Structure 2001-‐
2010 Source: Foshan Statistical Yearbook 2001-‐2011 Figure B.7 | Road Length of Foshan 2000-‐2010 Source: Foshan Statistical Yearbook 2001-‐2011 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 200 Figure B.8 | Foshan Electricity Consumption and Generation to Consumption Ratio 2002-‐2011 Source: Wu Jiang, Foshan's electricity background paper, NDRC,2013 Figure B.9 | Foshan Grid Investment 2002-‐2011 Source: Wu Jiang, Foshan's electricity background paper, NDRC, 2013 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 201 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 202 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 203 C H I N A ’ S E V O L V I N G G R O W T H M O D E L : T H E F O S H A N S T O R Y 204 F U N G G L O B A L I N S T I T U T E Telephone: +852 2300 2728 n fgicontact@fginstitute.org n www.fungglobalinstitute.org Disclaimer | This report reflects work in progress and the views expressed therein are those of the authors and do not necessarily reflect those of Fung Global Institute. The authors are solely responsible for any errors or omissions.

China`s Evolving Growth Model: The Foshan Story

Transcription

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